As mentioned previously, closing costs are a relatively minor portion of the total mortgage payback. While this is true, closing costs can still be significant. It seems like when it comes to buying a home, there are fees, fees, and more fees. The purpose in this section is to provide you with an understanding of the fees associated with a home purchase or mortgage refinance transaction.
The Loan Origination (line 801 on the GFE and HUD-1) is the fee that the broker / banker charges you for the cost of doing the loan. This fee is either paid by you or by the lender – the Dodd-Frank bill (along with other legislation) has changed the mortgage industry and how loan officers are paid. This fee directly impacts what the rate will be. In cases where you are planning on being in the home for a long time (5 years or more), it is prudent for you to pay this fee and get a lower rate from the lender. In situations where it is likely that you may only be in the home for a short time (less than five years), you are usually better off accepting a higher interest rate.
With the new laws, the Loan Discount fee (line 802) is a very similar to the origination fee and must be used for rates at par or below. Like the origination fee, by paying a loan discount fee, you are absorbing a greater portion of the broker’s / banker’s fee (the company, not the loan officer), relative to what the lender would pay, in exchange for a lower interest rate and, therefore, lower payments (remember that each .25% in rate reduction usually costs between .75%-1.25% of the loan). By paying a discount fee to lower the interest rate, you shift the timing of interest payments (you pay a little more interest up front in order to pay less over the long-term). Whether or not this is worthwhile depends on how long you intend on having your new mortgage. In the case of a purchase, discount points are tax deductible in the year of a purchase whereas they are amortized over the term of the loan in a refinance. A mortgage consultant will help you determine if this is beneficial for you. Additionally, it is a given that this is quite confusing and a good mortgage professional can help explain everything as it pertains to your specific situation.
The Appraisal Fee (line 803) covers the cost of having a licensed appraiser (usually an independent third party) appraise the home to determine its value. An appraisal is a necessary element to do almost any mortgage; the fee will usually be about $450 – it is more for investment properties and for homes that have repair items that will require a final inspection. Appraisals for custom homes or unique homes will usually cost more as well. This is often the only fee that is paid up front and is usually handled with a credit card. You should make sure that the loan officer you are working with has a solid conditional approval before he / she orders the appraisal; this gives you some assurance that you won’t be spending money on an appraisal for a loan that may just be turned down!
The Credit Report (line 804) provides the lender with necessary information regarding payment histories on mortgages, installment loans and revolving accounts. It also shows collection accounts, credit inquiries and “public record” information such as tax liens, bankruptcies, and judgments. A full Residential Mortgage Credit Report (RMCR) is usually between $50 and $75.
A Mortgage Broker Fee (synonymous with “Processing Fee,” line 808) of between $600.00 and $800.00 covers the cost of processing your loan in order to prepare it for delivery to the lender / investor (The fee varies depending on the broker / lender and the loan type.).
The Tax Related Service Fee (line 809) covers the cost of tax servicing over the course of the loan. The final lender charges this fee to cover the cost of employing a third party to make sure that the property taxes are being paid when they come due. This service protects both you and the lender.
The lender who ultimately funds your loan has fees that are in the range of $800-$1,200 for underwriting, loan document preparation and funding fees. These fees are often referred to as the Underwriting or Admin fee (line 811) or they may be itemized and reported on their specific lines. The underwriting fee often includes the Tax Service Fee as well as the Flood Certification Fee.
The Wire Transfer Fee (line 812) is usually about $15-50 and covers the cost of wire transfers between the lender and the title company and / or the cost of over-nighting documents from the lender to the title company and the payoff check to the old mortgage company.
All of the above costs are referred to as non-recurring closing costs. There are a few more that will be discussed shortly; however, in keeping with the order of the GFE and HUD-1, the next items to be discussed are the prepaid and reserve items.
Prepaid interest (line 901) is the interest that you pay on your loan from the funding date through the end of the month. For example, if your loan (purchase or refinance) funds on June 15, your first payment would not come due until August 1, 45 days from the funding date (the day the lender advances the money). In order to keep all of your payments the same, you prepay the 15 days of interest from June 15 through June 30 at the time of your loan. Be aware of low dollar amounts here when a lender provides a GFE. They are only required to show one day’s interest. However, if you close early in the month as opposed to the end of the month, you may need significantly more money to close than you had originally planned. In the case of a refinance, the sooner you close the better; you want interest to be accruing at the lower rate as soon as possible!
Mortgage insurance (line 902) is a monthly fee you pay as part of your mortgage payment if the amount of your loan exceeds 80% of your home’s value to insure against default. You may have a choice when it comes to mortgage insurance either to pay it monthly, pay it in a lump sum up front, pay it via an increase in your interest rate, or some combination of these choices. Call for an explanation of the differences between monthly mortgage insurance and “tax-advantaged” mortgage insurance (702-812-1214).
Hazard insurance (line 903) is your homeowners insurance. Most lenders require that you pay a year’s premium in advance and then they collect money each month via your escrow payment in order to make the payment when the policy renews a year from the funding date.
Tax and Assessment (line 904) is for the property taxes that have accrued on your property since the last time they were paid.
The VA Funding Fee (line 905) is a fee equal to between 2.15% and 3.30% of the loan amount (most cases). It is an up-front fee and is usually financed. This fee pays for all of the mortgage insurance that enables the VA loan to be offered devoid of a monthly mortgage insurance component which helps keep the monthly payment relatively low as compared to loans of similar size with a monthly mortgage insurance payment.
Section 1000 contains the reserve items deposited with the lender. If your mortgage is going to have an impound / escrow account where the lender pays the property taxes, homeowners insurance and mortgage insurance when they come due, then there will be a dollar amount on each of the line items 1001, 1002, and 1003. In addition to collecting a full year’s insurance premium on line 903, the lender will usually collect 2 months worth of premiums (line 1001); this funds the hazard insurance portion of your escrow / impound account through your first payment date. If you have month-to-month mortgage insurance, the lender will collect enough to pay the premium at least through your first payment due date, but nothing should be collected for line 902. Finally, the amount that will accrue for property taxes from the funding date until your first payment due date will be collected on line 1004. These are known as recurring closing costs because you pay property taxes at least yearly (quarterly in Nevada), homeowners insurance yearly, and mortgage insurance monthly.
There are two title fees that are also a necessary part of a mortgage loan. The biggest title fee is usually for Title Insurance (line 1108). However, it depends on whether the mortgage is a purchase or a refinance, a first or a second, and, if it is a refinance, how old the current title insurance is (you will often get a discount on title insurance if it is less than three years old). When the title company conducts the closing (line 1101), they will charge a fee for their work in preparing the HUD-1 settlement statement and for the time involved for signing the documents and handling the escrows. The new Good Faith Estimate that went into effect as of January 1, 2010 no requires lenders to show the owner’s title policy (purchases only) on the GFE as a buyer-paid charge although traditionally the seller pays this item.
The Document Preparation Fee (line 1105) is a fee charged by the title company for preparing the buyer’s closing package.
The Deed of Trust gets recorded at the county recorder’s office. For this, you pay a recording fee to the county recorder’s office.
Nevada, along with many other states, have a transfer tax that is paid whenever a property is transfered from one entity to another. This tax is $5.10 per $1,000; hence, a $100,000 purchase would mean a transfer tax of $510. This is also traditionally paid by the seller but, per the new 2010 GFE, must be shown as a buyer-paid item.
These fees constitute the charges to the various parties who play some integral part in the mortgage process. The actual fees that you may pay (both amount and type) may vary depending on the type of loan you get and the company and loan officer you procure it through. If you are only going to be in the house for a relatively short time (less than five years), you may consider taking a higher rate and paying less in closing costs. In fact, if you take a high enough rate, you may be able to get the lender to pay a portion of the costs (at the very least, some of the most significant costs could be offset). If you would like more details or to discuss your specific scenario with current rates, please call Jed at (702) 812-1214.
