The third installment of my posts on closing costs focuses on charges you may incur at closing from your lender. The vast majority of buyers do not have the cash to plunk down a few hundred thousand dollars to buy a home. As a result, most real estate transactions involve a loan through a mortgage broker. Not surprisingly, lenders do not work for free, and there are a number of costs you can expect to incur in connection with borrowing their money.
Unlike title charges and real estate tax credits, lender charges vary quite a bit depending on the lender and loan product you choose. However, there are some charges and costs that you can generally expect to see on the closing statement.
Lenders often charge an origination fee for a new loan. Ostensibly, this is the charge for the work necessary to vet you as a borrower and process the loan. This charge is typically in the range of $1,000, although it varies from lender to lender.
It is worth mentioning, that the lender is making much more than just the origination fee in terms of profit from originating the loan. Mortgage brokers make the bulk of their money on something called the yield spread premium. The yield spread premium is the difference between the interest rate at which the broker can borrow money from the end lender and the interest rate at which you borrow the money from the broker. That may sound a little unfair; however, it is important to understand that, as a borrower, you do not have access to end lenders who provide the funds. In addition, banks the fund loans from their own money do not offer better rates than mortgage brokers.
Whenever you borrow money to be secured as collateral for repayment of the loan, the lender wants to know that the collateral has enough value to repay the lender if you cannot. Fair enough. As such, part of the loan process involves having an appraiser determine the value of the property. Typically, this costs somewhere between $300 and $500.
There are several fees you may see on the settlement statement of a relatively small amount, which I typically characterize as “junk” fees. For example, there may be a credit certification fee ($10-$100). This is the fee from the service used by the lender to obtain transcripts of your tax returns from the IRS. Sometimes you will see a flood certification fee (usually around $10). The lender wants to see whether the property is in a FEMA flood zone, and determine whether to make you pay for flood insurance. You may also see a fee for obtaining your credit report (between $10 and $50).
When you make a mortgage payment, you pay interest for the preceding month. As a new borrower, your first mortgage payment will not be due until the beginning of the second full month after the closing date. This leaves interest for the month of closing unaccounted for in the loan payments. Since interest accrues daily, it is customary to pay the interest for the remaining day in the month of closing at closing. This is not exactly a loan charge, but it is something you will need to pay at closing. The amount varies depending on the amount you borrow, the interest rate and the time of the month you close.
In most cases, the lender will set up an escrow account for the borrower to handle payment of property taxes and insurance. Every month, the borrower pays some money into the escrow, and when the bills are issued, they are paid from the funds in escrow. At closing the borrower puts some money into the escrow to get it started. As with prepaid interest, it is not a charge, insomuch as the money still belongs to the borrower and will be used to pay the borrower’s property tax and insurance bills. The amount that goes into the escrow varies depending on the amount of the annual tax and insurance bills and the time of year the closing occurs.
As mentioned above, the lender costs can vary quite a bit depending on the lender and loan product. Do not necessarily be concerned if your settlement statement has additional costs or is missing some of these charges. What you should do to make sure you are not taken to the cleaners is to hire a good real estate attorney, like me, to make sure the charges are accurate!
If you have questions about real estate closings, or any other real estate matter, as always, you can contact me at firstname.lastname@example.org or 773-632-8330. To see what my clients have to say about me, please visit me at avvo.com or on my Google + page.