Closing Costs When Buying or Refinancing a Home

When you talk to a lender, they usually prepare a "Good Faith Estimate" of closing costs. Sometimes they will give it to you right away, but they are only required to mail it to you within three business days of application.
Because the lender is the one who prepares the estimate, many buyers associate all the closing costs with the lender. This is not correct. The lender is only preparing an estimate of the costs you may incur when buying or refinancing and is not required to list all potential costs. Nor does the lender know what all the costs are actually going to be. The estimate is an educated guess based on past experience. Some things will get left out. Always anticipate the actual costs are going to be more than the estimate.

When comparing two lenders, don't look at the "total" cost. Only compare the costs actually charged by each lender. Both lenders are only making informed guesses about costs charged by others.

Following is a detailed summary of costs you may have to pay when you buy or refinance your home. The costs are listed in the order that they should appear on a Good Faith Estimate you obtain from a mortgage lender.

There are two broad categories of closing costs. Non-recurring closing costs are items that are paid once and you never pay again. Recurring closing costs are items you pay time and again over the course of home ownership, such as property taxes and homeowner’s insurance.

Some of the items that appear here do not traditionally appear on a lender's Good Faith Estimate and lenders are not required to show all of these items.

Items Required to be Paid in Advance

Pre-paid Interest – Mortgage loans are usually due on the first of each month. Since loans can close on any day, a certain amount of interest must be paid at closing to get the interest paid up to the first. For example, if you close on the twentieth, you will pay ten days of pre-paid interest.

Homeowner’s Insurance – This is the insurance you pay to cover possible damages to your home and other items. If you buy a home, you will normally pay the first year’s insurance when you close the transaction. If you are buying a condominium, your Homeowners’ Association Fees normally cover this insurance.

VA Funding Fee – On VA loans, the Veterans Administration charges a fee for guaranteeing your loan. If you have not used your VA eligibility in the past, this is two percent of the loan balance. If you have used your VA eligibility before, it is three percent of the loan. If you are refinancing from a VA loan to a VA loan, it is three-quarters of a percent of the loan amount. Instead of actually paying this as an out-of-pocket expense, most veterans choose to finance it, so it gets added to the loan balance. This is why the loan balance on VA loans can be higher than the actual purchase amount.

Up Front Mortgage Insurance Premium (UFMIP) – This is charged on FHA purchases of single family residences (SFR’s) or Planned Unit Developments (PUDs) and is 2.25% of the loan balance. Like the VA Funding Fee it is normally added to the balance of the loan. Unlike a VA loan, the homebuyer must also pay a monthly mortgage insurance fee, too. This is why many lenders do not recommend FHA loans if the homebuyer can qualify for a conventional loan. However, condominium purchases do not require the UFMIP.

Mortgage Insurance – though it is extremely rare nowadays, some first-time homebuyer programs still require the first year mortgage insurance premium to be paid in advance. Most mortgage insurance (when required) is simply paid monthly along with your mortgage payment. Mortgage insurance covers the lender and covers a portion of the losses in those cases where borrowers default on their loans.

Reserves Deposited with Lender

If you make a minimum down payment, you may be required to deposit funds into an impound account. Funds in this account are your funds, and the lender uses them to make the payments on your homeowner’s insurance, property taxes, and mortgage insurance (whichever is applicable). Each month, in addition to your mortgage payment, you provide additional funds which are deposited into your impound account.

The lender’s goal is to always have sufficient funds to pay your bills as they come due. Sometimes impound accounts are not required, but borrowers request one voluntarily. A few lenders even offer to reduce your loan origination fee if you obtain an impound account. However, if you are disciplined about paying your bills and an impound account is not required, you can probably earn a better rate of return by putting the funds into a savings account. Impound accounts are sometimes referred to as escrow accounts.

Homeowners Insurance Impounds – your lender will divide your annual premium by twelve to come up with an estimated monthly amount for you to pay into your impound account. Since a lender is allowed to keep two months of reserves in your account, you will have to deposit two months into the impound account to start it up.

Property Tax Impounds – How much you will have to deposit towards taxes to start up your impound account varies according to when you close your real estate transaction. For example, you may close in November and property taxes are due in December. Your deposit would be higher than for someone closing in May.

Mortgage Insurance Impounds – When required, most lenders allow this to simply be paid monthly. However, you may be required to put two months worth of mortgage insurance as an initial deposit into your impound account.

Non-Recurring Closing Costs not associated with the Lender

Closing/Escrow/Settlement Fee – Methods of closing a real estate transaction vary from state to state, as do the fees.

Title Insurance – Title Insurance assures the homeowner that they have clear title to the property. The lender also requires it to insure that their new mortgage loan will be in first position. The costs vary depending on whether you are purchasing a home or refinancing a home, so we will not provide a range here.

Notary Fees – Most sets of loan documents have two or three forms that must be notarized. Usually your settlement or escrow agent will arrange for you to sign these forms at their office and charge a notary fee in the neighborhood of $40.

Recording Fees – Certain documents get recorded with your local county recorder. Fees vary regionally, but probably run between $40 and $75.

Pest Inspection – also referred to as a Termite Inspection. This inspection tests not only for pest infestations, but also other items such as wood rot and water damage. The inspection usually runs around $75. If repairs are required, the amount to cover those repairs can vary. The seller will usually pay for the most serious repairs, but this is a negotiable item. Usually (not always) the pest inspection fee is paid by the seller of the home and is not normally reflected on the Good Faith Estimate.

Home Inspection – Since it is the homebuyer’s choice to obtain a home inspection or not, this cost is not usually reflected on a Good Faith Estimate. However, it is recommended. Keep in mind that the home inspector has a certain set of standards he uses when inspecting a home, and those standards may be higher than required by local building codes. An example is that an inspector may note there is no spark arrestor on a chimney but the local building code may not require it. This sometimes leads to conflicts between buyer and seller.

Home Warranty – This is also an optional item and not normally included on the Good Faith Estimate. A Home Warranty usually covers such items as the major appliances, should they break down within a specific time. Often this is paid by the seller.

Loan Tie-in Fee - Although this sounds like a lender fee, it is not. When charged, it is usually by a settlement agent (escrow, lawyer, etc) and is to compensate them for services they provide in dealing with the lender.

Sub-escrow Fee - When charged, the source of this fee is usually the title insurance company. It is usually to compensate them for activities in coordinating with the settlement agent (lawyer, escrow company, etc).

Courier Fee - Sometimes charged and deals with the costs associated with ferrying documents around between the lender, title, escrow, settlement, etc.

Homeowner’s Association Transfer Fee – If you are buying a condominium or a home with a Homeowner’s Association, the association often charges a fee to transfer all of their ownership documents to you.

Refinancing Associated Costs

Interest - When you close the transaction on your refinance, there will most likely be some outstanding interest due on the old loan. For example, if you close on August twentieth (and you made your last payment), you will have twenty days interest due on the old loan and ten days prepaid interest on the new loan. Your first payment on the new loan would not be until October 1st since you have already paid all of August's interest when you closed the refinance transaction (since interest is paid in arrears, a September payment would have paid August's interest, which has already been paid in closing).

Reconveyance Fee – this fee is charged by your existing lender when they "reconvey" their collateral interest in your property back to you through recording of a Reconveyance. This fee can vary from $75 to $125.

Demand Fee – your existing lender may charge a fee for calculating payoff figures. If they do, this fee may run in the neighborhood of $60.

Asking the Seller to Pay Closing Costs - Rules and Advice.

It has become common to ask the seller to pay some or all of the closing costs when you purchase a home. Essentially, this is financing your closing costs since you will probably pay a little bit more more for the property than you would if you were paying your own costs.

Keep in mind a few simple rules. On conventional loans you can only ask the seller to pay non-recurring costs, not prepaids or items to be paid in advance. If you are putting ten percent down or more, the most the seller can contribute is six percent of the purchase price. If you are putting less down, the most the seller can contribute is three percent.

On VA loans, you can ask the seller to pay everything. This is called a "VA No-No," meaning the buyer is making no down payment and paying no closing costs. It is wise for the seller to put a ceiling on the amount they will pay, just to make sure no one gets carried away.

On FHA loans, you can also ask the seller to pay everything. However, the buyer must have a minimum three percent investment in the property, whether that is applied toward down payment, closing costs, or prepaids. The three percent can be from their own pocket or a gift from a family member.

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About Blaine Morris, Marin Properties

As a top-producing licensed REALTOR with Frank Howard Allen in Greenbrae, California, Blaine Morris specializes in Central and Southern Marin County. Always just a phone call or email away, Blaine works seven days a week for his clients, providing them with the utmost in fast and efficient service and follow through. Whether you are searching for the home of your dreams, or thinking of selling it, Blaine can turn your dreams into reality! Behind Blaine is the strength and stability of the Central Marin office of Frank Howard Allen, the #1 office of the #1 Brokerage in Marin County.

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