| Consumer's Guide To Mortgage
Settlement Costs
Of all the steps in buying a home or refinancing a
loan, the mortgage closing or settlement probably causes more
confusion and uncertainty for the borrower than any other.
A settlement may involve several people, and a
variety of documents and fees. Once you understand what is involved,
you may find the entire closing process far simpler than you might
have imagined. While this brochure focuses on settlements in home
purchases, much of the information also will be useful if you are
refinancing a mortgage.
Let's start with two important facts.
Fact Number 1:
Many buyers may think of
settlement as the last step to becoming the legal owners of their new
home. But it's a process that begins weeks or even months before, and
follows an outline set largely by a buyer's original offer to the
seller of the house. That offer becomes the sales contract, once it's
signed by the seller, and it covers many of the key elements of the
settlement or closing.
Fact Number 2: Practices differ from one
locality to another regarding who pays what closing costs. Across the
country, however, buyers and sellers are free to negotiate certain
fees. In some cases, certain costs can be shifted, it may affect the
sale price of the property. In most states, costs can also be cut by
shopping around among providers of the settlement services.
The point is this: The more you know about the
process, the better your chances are for saving money at settlement
time.
There are three basic categories of charges and
fees in settlement or closing transactions:
- Charges for establishing and transferring
ownership.
These include title search, title insurance, related legal fees,
and fees for conducting the settlement.
- Amounts paid to state and local governments.
These include city, county and state transfer taxes, recordation
fees, and prepaid property taxes.
- Costs of getting a mortgage.
These include survey, appraisals, credit checks, loan
documentation fees, notary charges, loan origination, commitment
and processing fees, hazard insurance, interest prepayments, and
lender's inspection fees.
Let's examine them one by one.
When someone buys or sells a car, proving
ownership is relatively easy. The owner has a certificate of title
issued by the state in which the car is registered. When it comes to
houses, providing clear title is not so simple. Moreover, your lending
institution will not give you a mortgage loan on a house unless you
can prove that the seller owns it. The proof comes in the title
search.
How the title search is carried out depends upon
where the property is located. In many parts of the country, public
records affecting real estate title are spread among several local
government offices, including recorders of deeds, county courts, tax
assessors, and surveyors. Records of deaths, divorces, court
judgments, liens, and contests over wills (all of which can affect
ownership rights) also must be examined.
In a few localities, property records are fully
computerized and the job can be completed fairly quickly. In the
majority of localities, however, title search must be performed to
establish the seller's clear title. This means examining public
records, in courthouses and elsewhere, to assure both you and your
lender that there are no claims against the property that you are
buying.
The title search may be carried out by an escrow or
title company, a lawyer, or other specialist.
In addition to a formal title search, your
lender is likely to require a title insurance policy. The policy
guards the lender against an error by whomever searched the title. (In
some cases, the title insurer might arrange for or conduct the title
search.) Let's say, for example, that a long-lost relative of the
seller turns up with indisputable evidence that the relative - and not
the seller - holds legal title to the property. Though it should have
been found in the public records, the relative's claim was missed
somehow. Errors are rare, but they do occur.
When this happens, the lending institution finds
that it has loaned the homebuyer thousands of dollars to buy a house
from someone who did not own it. To avoid such problems, the lender
will insist on title insurance prior to settlement. The cost of the
policy ( a one-time premium ) is usually based on the loan amount, and
is often paid by the purchaser. There's nothing, however, to keep you
from asking the seller, during your negotiations, to pay part or all
of the premium.
The title insurance required by the lender protects
only the lender. To protect yourself against unforeseen title
problems, you may also want to take out an owner's title insurance
policy. Normally the additional premium cost is only a fraction of the
lender's policy, but this can vary from area to area.
Some final advice on keeping title insurance costs
low: if the house you are buying was owned by the seller for only a
few years, check with a title company. If you can obtain a re- issue
rate, the premium is likely to be significantly lower than the regular
charge for a new policy. If no claims have been made against the title
since the previous title search was done, the seller's insurer may
consider the property to be a lower insurance risk.
Finally, shop around. Not just for the premium
(which can vary depending on how much competition there is in a market
area), but for coverage as well . Generally, you should look for a
policy with as few exclusions from coverage as possible. The
exclusions are listed in each policy. Some policies have so many
exclusions - that is, situations under which the insurer will not pay
for your title problems - that you end up with little coverage for
your premium dollar.
In some parts of the country, the transfer,
recordation, and property taxes collected by local and state
governments may be among the heftiest charges paid at settlement.
While there is no way to avoid paying these taxes,
you may be able to lessen your share of the bill. Try shifting some or
all of the cost to the house. But remember, you must do this when you
make your offer to purchase the property.
The costs of getting a mortgage may be imposed
by your lender as early as when you apply for your loan.
Mortgage-related closing costs include:
- Application Fee.
Imposed by your lender, this charge covers the initial costs of
processing your loan request and checking your credit report.
- Appraisal Fee.
This fee pays for an independent appraisal of the home you want
to purchase. The lender requires this opinion or estimate of the
market value of the house for the loan.
- Survey.
At a minimum, the lender will require an independent
verification from a surveying firm that your lot has not been
encroached upon by any structures since the last survey
conducted on the property. Alternatively, the lender may insist
upon a complete (and more costly) survey to ensure that the
house and other structures legally are where you and the seller
say they are.
- Loan Origination Fees and Discount Points.
The origination fee is charged for the lender's work in
evaluating and preparing your mortgage loan. Discount points are
prepaid finance charges imposed by the lender at closing to
increase the yield to the lender beyond the stated interest rate
on the mortgage note. One point equals one percent of the loan
amount. For example, one point on a $75,000 loan would be $750.
In some cases - especially with refinances - the points can be
financed by adding them to the loan amount.
- Mortgage Insurance.
Buyers who make down payments less than 20 percent (and in some
cases 30 percent) of the value of the house may be required by
lenders, and by law in some states, to take out mortgage
insurance. The policy covers the lender's risk in the event the
buyer fails to make the loan payments. Premiums are typically
paid annually from an escrow or reserve account, or in a lump
sum at closing. A buyer, whose mortgage is insured by FHA or
guaranteed by VA, will have to pay FHA mortgage insurance
premiums or VA guarantee fees.
- Homeowner's & Hazard Insurance.
A form or protection against physical damage to the house by
fire, wind, vandalism, and other causes. Your lender will expect
you to have a policy in effect at closing.
Depending upon the location and type of
property, and extra services you or your lender request, you may also
have to pay some of the following at closing:
- An assumption fee is charged when you are
taking over or assuming an existing mortgage on the house. The
size of the fee will depend on the lender, but it may range from
several hundred dollars to 1 percent of the loan amount.
- Home inspection fees for an analysis of the
structural condition of the property by an engineer or
consultant, and for termite inspections.
- Adjustments for various types of expenses
prorated between the seller and the purchaser. Some of the
adjustments may involve large amounts. Local property taxes,
annual condominium fees and other lump-sum service charges, for
instance, may be split between you and the seller to cover your
respective periods of ownership for the calendar year or tax
period.
Settlements are conducted by lending institutions,
title insurance companies, escrow companies, real estate brokers, or
attorneys. In most cases, whoever conducts the settlement is providing
a service to the lender. You may be required to pay for related legal
services provided to the lender. You can also retain you own attorney
to represent you at all stages of the transaction including
settlement.
With such a long list of potential charges at
settlement, it is important to know what to expect. To enable you to
do that, Congress passed the Real Estate Settlement Procedures Act
(RESPA). Your mortgage lender is required to supply you with a Good
Faith Estimate of all your closing costs within three business
days of your application for a loan, together with a special
information booklet called Settlement Costs - A HUD Guide. In
addition, a statement of your actual costs should be given to you at
or before settlement. Within the same three days, the lender is
required, under the Truth in Lending Act, to provide you with a
disclosure estimating the costs of the loan you have applied for,
including your total finance charge and the Annual Percentage Rate
(APR). The APR expresses the cost of your loan as a yearly rate.
This rate is likely to be higher than the stated interest rate on your
mortgage because it takes into account discount points, mortgage
insurance, and certain other fees that add to the cost of your loan.
Because customs vary significantly from area to
area, it is difficult to provide estimates for closing costs that fit
everywhere. One rule of thumb for buyers is to figure that at least an
additional 3 percent will be added to the price of your home through
settlement expenses. In some relatively high-tax areas of the country,
5 to 6 percent is more common.
On the page below, is a sample range of closing cost
charges for specific services on a $75,000 home purchase with either a
10 percent down payment or a 20 percent down payment. |
