Closing Costs on a Mortgage

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Mortgage and Lending with Guaranteed Rate, Marin County, CA NMLS: 22343

Closing Costs on a Mortgage

 

When a homebuyer, or homeowner looking to refinance, obtains a mortgage, there are always associated costs.  Even in the so-called "no cost" loan structures, trust me, you're paying something.  When a consumer does the research on what it will cost to get a loan, there are a few ways to categorize and better understand what's being charged.  Specific numbers will vary wildly depending on the nature of the transaction, the amount and where the settlement takes place.  A key takeaway of this article will be to differentiate between a "cost" and a "settlement charge."  They are not the same, and how they interact plays a large part in the total amount of cash a borrower ends up bringing to the closing table.  I have found that by using three broad categories, we can get a better sense of how things will play out, and as a result, feel less of a sense of shock about the total amount of any settlement.  Let's look at these "buckets" now:

 

Lender Costs and Fees

Most lenders will charge an "origination fee," and that cost is usually intended to cover their overhead.  What I see across the industry is that this fee will typically range from $500 to $1500, though it may be called something other than origination.  Lenders might also charge separate fees for credit reports, appraisals, flood certs and tax service, for example.  If you are paying any discount points to lower your rate, they will be listed in this section as well.

 

Title/Escrow/Closing Agent Fees

Two things you'll likely need in your transaction will be a closing agent (this can be an escrow company, attorney or other, depending on the real estate practices in your area) and some form of title insurance.  While your fees for the settlement services themselves and the title insurance policy(s) will be the largest costs in this category, you'll also see smaller amounts such as document preparation, notary, recording and other costs associated with title and escrow.

 

Prepaid Items

If there's a place where things get tricky and where a settlement can "blow up," this is it.  "Prepaids" are amounts of mortgage interest, property taxes, insurance (both homeowner's and flood, if required) and other components of the total monthly housing payment that are collected in advance and that contribute to your settlement.  Without going into the complex calculations, know that when you have an impound or escrow account and you close a purchase or refinance transaction, your lender will collect those amounts in multiples of months.  If the timing of your close predicates that you must reserves six months of property taxes and your property taxes are $6000 per year ($500 per month) then at close the lender will collect $3000 in tax impound reserves.  It should be noted that this is not a "cost" of getting the loan.  Your property taxes are due once you are an owner, but how you pay them drives this calculation and adds to your settlement. 

 

While in this category, let's do a little refresher on how mortgage payments are made.  You pay mortgage interest 'in arrears,' which means that you live in the house for one month and then you pay your mortgage payment on the first date of the next month.  If you close a home transaction on July 15, for example, your first payment on your mortgage will be due on September 1, not August 1.  But why?  Because mortgage interest is paid in arrears.  At this closing, you would pay prepaid interest from July 15 through the end of July.  You would have no August 1 regular payment (sometimes called "skipping a payment").  Then, because you'd live in the home all of August, you would get a 'regular' mortgage statement on September 1 for that time. It is by this logic that we discourage our clients from financing the prepaid interest, which can amount to several thousand dollars.  If your settlement statement shows this amount of closing costs, it may be financially wise to bite the bullet and pay it, as you will not have your regular mortgage payment coming right on the heels of the closing.

 

Understanding how closing costs work goes a long way to understanding the actual amount you'll see on your settlement statement. In any transaction there will be a total settlement amount, of which only a part will be actual costs to get the loan.  Still, there is always a bottom line and understanding that at the start can help avoid confusion and unwanted surprises with cash to close.   If you have questions or need my help, get in touch any time.

 

Coffee is for closers, 

 

 

Robert J. Spinosa
Vice President of Mortgage Lending

Guaranteed Rate
NMLS: 22343 
Cell/Text: 415-367-5959 
rob.spinosa@rate.com

 

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960

Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
 

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate's Human Resources Department.

 

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood ChicagoIL 60613 - (866) 934-7283

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Tags:
discount
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points
home loan
closing
closing costs
escrow
fees
settlement
prepaid interest
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origination
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Rainmaker
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Tatyana Permanova
Highlight Realty - Fort Lauderdale, FL
561-756-6962 - Miami, Fort Lauderdale | Boca Raton RE

Great post! Thank you!

I hope you have a nice weekend!

Jul 20, 2019 08:52 AM #1
Rainer
159,304
Don Baker
Lane Realty - Eatonton, GA

We had a perfect loan officer when it came to our options of refinancing.  He quickly let us know that if we'd just keep paying the extra amount we have been for 5 more years we'd be better off and in the end pay less than if we re-fi'd with the lower rate because of the fees.  

Jul 20, 2019 09:01 AM #2
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Debb Janes EcoBroker and Bernie Stea JD
ViewHomes of Clark County - Nature As Neighbors - Camas, WA
REALTORS® in Clark County, WA

Thanks for this, we have a seller/buyer who was wondering what happens when she is the buyer in terms of closing funds she will need. It's complicated. Lol. 

Jul 20, 2019 11:00 AM #3
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Anna Banana Kruchten CRB, CRS 602-380-4886
Phoenix Property Shoppe - Phoenix, AZ
Arizona's Top Banana!

Hi Rob Spinosa very good explanation of closing costs that will be very helpful to home buyers.

Jul 20, 2019 02:51 PM #4
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Rainmaker
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Rob Spinosa

Vice President of Mortgage Lending, Marin County
Can I Get a Jumbo Loan with 10% Down?
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