Closing and Settlement Costs
Closing and Settlement Costs - what are they?
With every purchase or refinance transaction, there will be closing costs. Closing costs can be paid by the buyer/borrower, or the seller, or the lender via closing cost credits and all of the following should appear on your Good Faith Estimate.
- Points -Points are fees paid to buy down your rate. If you are paying points to receive a rate, it means that the rate is below par. Par rate is generally the rate you can get with 0 points. These fees are included on Line 1 of the GFE. Points are optional - you normally do not need to pay them unless you want to buy down your rate below par
- Lender/Loan fees – These are fees such as underwriting, processing, tax service, flood cert, wire fees, appraisal fee, document fees, HOA condo cert fees. These fees are fees charged by the lender or lender affiliates and are related to obtaining the loan. These fees can be reduced if your lender pays for some or all of these fees by giving you a closing cost credit.
- Broker compensation – this is the fee paid to the broker to originate the loan. These fees are included on Line 1 of the GFE, and on most of our loans, will be paid by the lender, not the borrower, so you don’t have to worry about paying any premium for our broker services
- Escrow/Title fees – these are fees paid to the escrow and/or title company for their services and include all the closing agent settlement fees, all title companies fees, wire fees, courier/messenger fees, document preparation, and notary fees.
- County or City Transfer Tax – this is a fee paid to the County Recorder to transfer the property from one party to another. In Southern California, this fee is often paid by the seller even though it is shown on the buyer’s GFE.
- Prepaid Items – these are fees that need to be paid at closing, but are also recurring costs. These are considered settlement fees and not closing costs. Examples are prepaid interest, homeowners insurance, and reserves for setting up your escrow account.
- Prepaid interest - prepaid interest is similar to daily rents. When your loan funds on a day that is not the last day of the month, there will be prepaid interest showing on your closing statement. It covers the daily interest from the day your loan closes until the end of the month. The reason this is required is because when your mortgage pmts start, it must be for a full month. Therefore any interest owed on the first partial month must be paid upfront.
- Home insurance -You will also need to provide the initial premium for your homeowners insurance policy. In some cases this may include flood, earthquake or other insurance coverage as well. Finally, the last item that is usually prepaid is for property taxes.
- Escrow Account Funds - This is an amount the lender requires you to deposit at closing to set up an “escrow account” to cover your future property tax and/or insurance payments. These are not fees, think of this as a “forced savings account” which, when established properly, will allow the lender to have sufficient funds to pay these bills for you when they come due. These costs will be the same regardless of the lender you choose. Prepaid reserves are always required whenever your mortgage payment includes property taxes and/or insurance with your monthly payment. Not all loans require an escrow impound account, however it is usually required if you have less than 10% down payment or 10% equity in the home. Some lenders will offer a better interest rate or pricing if you elect to include an escrow acccount with your mortgage payments.
Note: As taxes are due at various times, the deposit needed for taxes may vary from 2 to 8 months. The amount of the escrow reserves calculated will depend on the month you close and the month your 1st mortgage pmt starts. There is usually a 2 month cushion added into the reserve requirements in case of any tax or insurance premium increases.
Here is a definition of the other 3rd party closing costs that are standard with most loan transactions: LINK TO CC DEFINITIONS