Closing Costs When Buying or Refinancing a HomeThis is a detailed summary of costs you may have to pay when you buy or refinance your home on the San Francisco Peninsula*. 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. When applying for a mortgage, borrower's will always (required by the DRE) receive a good faith estimate of charges. In California, the DRE prefers mortgage brokers to use a two page Mortgage Loan Disclosure Statement (MLDS) in lieu of the older Good Faith Estimate forms, which did not disclose some information. Non-Recurring Closing Costs
Loan Discount Points – These are "points" which are associated with the interest rate on your loan. Generally, if you are willing to pay more in points, you will get a lower interest rate.
Loan Origination Points or Mortgage Broker Fee – About seventy percent of loans are originated through mortgage brokers. Wholesale lenders offer lower costs/rates to mortgage brokers than you can obtain directly, so you are not paying "extra" by going through a mortgage broker. Many lenders are wholesale only and do not have retail divisions for the public. The loan origination fee is measured in "points." One point is equal to one percent of the mortgage loan. A simple loan will often cost only one origination point. When situations are more difficult (i.e. recent credit issues) it is not uncommon for three to five loan origination points.
Appraisal Fee – Since your property serves as collateral for the mortgage, lenders want to be certain of the value and they require an appraisal. The appraisal determines if the price you are paying for the home is justified by recent sales of comparable properties. Unique and more expensive homes usually have a higher appraisal fee. Appraisal fees vary, but are typically in the neighborhood of $300 for a home up to $500,000.
Credit Report – As part of the underwriting review, your mortgage lender will want to review your credit history. The credit report can be as little as seven dollars, but often runs between $55, due to the requirements of lender.
Tax Service Fee – During the life of your loan you will be making property tax payments, either on your own or through your impound account with the lender. Since property tax liens can sometimes take precedence over a first mortgage, it is in your lender’s interest to pay an independent service to monitor property tax payments. This fee usually runs between $70 and $80 and is sometimes "lumped" in with lender's fees.
Processing Fee – Processing the folders of paperwork generated by the loan packages runs anywhere from $295 to $550 depending upon the lender and difficulty.
Flood Certification Fee – Your lender must determine whether or not your property is located in a federally designated flood zone. This is a fee usually charged by an independent service to make that determination. Approx $20.
Administration Fee – If an administration fee is charged, you will sometimes find there is no underwriting fee (or other fee). This is not always the case.Other Lender Fees
This category can vary from lender to lender and cannot be associated directly with the cost of the loan. These fees cover costs of the lenders and are used to offset the fixed costs of loan origination. You will find some combination of these fees on your Mortgage Loan Disclosure Statement (MLDS) and the total usually varies between $550 and $1250. In some cases, many of these fees will be "lumped" together under "Lender's Fees".
Underwriting Fee – It is difficult to determine the exact cost of underwriting a loan since the underwriter is usually a paid staff member. This fee is usually in the neighborhood of $300 to $350.
Document Preparation – Before computers made it fairly easy for lenders to draw their own loan documents, they used to hire specialized document preparation firms for this function. This was the fee charged by those companies. Nowadays, lenders draw their own documents. This fee is charged on almost all loans and is usually in the neighborhood of $200.
Appraisal Review Fee – Even though you will probably not see this fee on your MLDS, it is charged occasionally. Some lenders routinely review appraisals as a quality control procedure, especially on the higher valued properties in the San Francisco Bay Area. This fee is in the neighborhood of $150. In special (usually high property values) circumstances another full appraisal may be required.
Warehousing Fee - Some lenders have a warehouse line of credit in order to fund your loan at closing time. This is more common in specialty lending.
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.
Hazard 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.
Mortgage Insurance – Some first-time homebuyer programs require the first year or several months mortgage insurance premium to be paid in advance. Most mortgage insurance 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. This is not related to optional insurance which may be purchased for cases of sickness or injury.
Reserves Deposited with Lender
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 due to it's convenience. Many lenders will charge 0.25 points if you do not have an impound account. Impound accounts are sometimes referred to as escrow accounts.
Hazard 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. This is in addition to the one year paid in advance from the previous section.
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 four months worth of mortgage insurance as an initial deposit into your impound account.
Non-Recurring Closing Costs not associated with the Lender
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-$75.
Recording Fees – Certain documents get recorded with your local county recorder. Fees run around $75.
Pest Inspection – Usually (not always) the pest inspection fee is paid by the seller of the home and is not normally reflected on the MLDS.
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 January tenth (and you made your last payment), you will have ten days interest due on the old loan and twenty days prepaid interest on the new loan (see section above for prepaid interest). Your first payment on the new loan would not be until March 1st since you have already paid all of January's interest when you closed the refinance transaction.
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 drastically, but is typically from $50 to $250.
Demand Fee – Your old lender may charge a fee for calculating payoff figures. This fee can also vary drastically, but is typically from $30-$100
Loan Tie-in Fee – though it sounds like a lender fee, this cost is actually charged by the escrow company.
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. This fee will vary depending on the will of the home owner's association.
Asking the Seller to Pay Closing Costs - Rules and Advice.
During normal and slow market conditions, 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.
Please note: During times when there is a strong "seller's market" this practice is abandoned due to the availability of so many more attractive offers.
* FHA, VA, Cal-Vet etc. loans were not covered due to their low loan limits and the San Francisco Peninsula's high sales prices.