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Closing Cost Explained
Below is an overview of different types of closing costs involved on a home loan that you will incur as a buyer. While some costs reoccur over the length of the loan period, others are required to be paid as one-time fees. As you apply for a home loan, you will get a rough estimate of settlement charges along with a booklet that explains these closing costs in delineate.
Loan Origination Fee
L.O. fee or the loan originating fee covers the administrative costs levied on the lender during the loan process. This is a one-time fee which is often articulated as a small fraction of the loan amount. The loan originating fee is approximately 1% of the total loan amount. However, one must remember that you can obtain a loan without any originating fee, but with a slightly higher interest rate.
Loan discount also termed as “Points”, is a one-time fee used to adjust the loan to the current market conditions. One point equals to 1% of the total loan amount and is rarely levied when the rate of interest is low.
Another one-time fee, appraisal fee pays for the home assessment, generally carried out by the lender to estimate the value of the property. The property value assessment can be carried out by an appraiser and can cost the buyer approximately $300 to $450 or even more, depending on the location and size of the property.
Credit Report Fee
Credit report fee covers the cost of credit report run by credit reporting agency and is a one-time fee. This fee usually runs up to $75 or more depending on the property.
Title Insurance Fee
Two title policies exist: A buyer’s title policy that protects the buyer and a lender’s title policy that protect the money lender against any monetary loss or any loss due to title defect. These are one-time charges and the buyer usually needs to shell out $200 or more (depending on the property) for buyer’s title policy.
Miscellaneous Title Charges
The buyer also needs to shell out money for document preparation, title search, notary fees, title examination, recording fee and the closing fee charged by the title company. These charges can add up to $200 or more (depending on the property) and are one-time fees.
Documentation Preparation Fees
This is a separate closing cost fee that covers the preparation of all the final legal documents, generally including the deed and the note of trust. The cost of legal documents can run into $150 or more.
Various other lender fees that a buyer may need to pay may include a flood certification fee, an underwriting fee, amortization schedule fee and various other assorted fees. These fees are disclosed by the lender at the time of loan application and usually varies from $450 to as high as $900 or more.
Prepaid interest is influenced by the time of month during which the loan closes and generally varies from just a few days interest to full month interest. For instance; if your home loan closes at the end of the month, you need to pay only a few days interest; however, if your loan closes during the month’s beginning, you have to pay the maximum amount of interest.
Private Mortgage Insurance (PMI) Premium
As a buyer, you need to pay a certain amount of money upfront depending on your down payments, as this protects the lender against any loss that he may experience due to foreclosure. You may also be asked to put some money into a special reserve account held by the lender.
Beginning of the Escrow Account
The money lender you have approached will have an account where your property insurance and taxes will be held. The escrow account is generally started with 2 months advance taxes along with the tax for number of months that have passed during the year. For instance: If 5 months have passed, the account will hold 7 months of taxes. The property insurance collected in advance (1 year’s insurance in advance) along with 2 months taxes will be present in the Escrow account.
Earnest Money Deposit
As a buyer, you need to have a complete understanding of the earnest money deposit to avoid placing yourself in an awkward position while making a purchase. When a written offer is made by the seller during the purchase, the buyer may need to include a cashier’s check, a personal check or cash. After the acceptance of the offer, the said amount of money is cashed into the designated trust account and remains in the account until the deal is closed. The agreed amount of money is credited to the buyer and is perceived as a partial down payment, representing the buyer’s intention to make the purchase.
A preliminary title commitment is required by both the parties, lender as well as the buyer, upon the purchase of the property. This title commitment indicates what exactly recorded liens, recorded easements, and encumbrances that are presently in effect on the house. This title insurance or commitment also indicate any restrictions on property’s use or the vested owner of record. For all practical purposes, title insurance is required throughout the country for all kind of properties and is normally seen as a seller expense. But the buyer should furnish a lender’s policy which shows the lender as the lawful holder of the said property. This charge is a part of the closing cost and incurs at the time of settlement. When the property purchase is closed and all the necessary documents have been documented by the title company, title insurance is issued by the title company as a policy binder on the lender as well as the buyer.
To close the deal, a buyer needs to bring his driving license and a cashier check to pay for the remainder of the down payment. At the closing, the buyer needs to sign the cashiers check over to the closing attorney. If the closing is not completed, the cashier check can be deposited in your own account.