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Understanding Closing Costs
Closing Costs are the fees incurred when you close on your transaction. A
good way to look at them is as the cost of borrowing money. Generally they are fees paid to different people for something they provided that was a requirement for the loan’s approval or set up.
Here is a list of common closing costs and a brief description of what they represent:
Loan Origination Fee
The loan origination fee is the fee the lender charges to originate the loan, generally 1% of the loan amount. In some markets it is customary to not charge a loan origination fee. That generally means that the rate the lender is charging has been adjusted so they can generate the same income on the loan. Just as additional income can be paid to reduce the rate on the loan (see discount points below), a slightly higher rate will yield a premium the lender can use to cover the origination fee without charging the borrower out of pocket for it.
Discount Points
Mortgage loans when they are pooled into mortgage backed securities require specific yields or rates of return. If you want a rate lower than the prevailing rate you can obtain it by paying additional money up front to have the lender discount the note rate. Discount points, expressed as a percentage of the loan amount, are delivered with the loan to the investor as prepaid interest to offset the lower note rate on the loan and give them the same yield on the loan. Discount points are not a requirement and you are encouraged to talk to your loan officer about whether or not it makes sense to pay them to lower the rate on a loan.
Appraisal
The appraisal is an independent opinion of the value of the property by a licensed professional and is used to help determine the property’s suitability as collateral for the loan.
Credit Report
A credit report is a detailed history of how all borrowers have handled their credit obligations including type, amount, payment, and payment history from all three major credit repositories. The credit report is used to make a lending decision.
Administrative Fee
This fee represents miscellaneous charges (like overnight delivery) the lender might incur while processing your loan.
Final Inspection
In new construction, the property is often appraised before construction has been completed. A final inspection is done by an independent third party to ensure that the property has in fact been completed to the plans and specifications for construction.
Attorney Fee
The attorney fee is the cost charged for the review of your closing documents by a licensed attorney.
Title Insurance
Title insurance is an insurance policy that protects the title of ownership on the property once you’ve bought it. In other words, it guarantees that subject only to your mortgage, there are no other claims against the property.
Settlement Fee
A settlement fee is the charge a title company or a settlement attorney would charge for presiding over a closing; making sure all the documents are signed correctly, all closing conditions of the loan are met, and the loan is appropriately recorded.
Recording Fees
Recording fees are the charge by the government recording entity for recording the change in ownership and the encumbrance of a mortgage on the property you purchase to make it of record.
Survey
The survey determines the physical boundaries of your property as well as identifies any encumbrances or easements that may create title issues.
Flood Certification
The flood certification is the certification by an independent third party that your property has been checked against the current federal flood zone maps and whether or not it is located in a flood zone.
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Copyright 2004 DHI Mortgage
Site created & maintained by DHI Mortgage
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Arizona license # BK0901845, DHI Mortgage Company I, LTD. Georgia Residential Mortgage Licensee, License # 13591 at 12554 Riata Trace Parkway, Austin,Texas 78727. Illinois Residential Mortgage License # 05470(A) , at 12554 Riata Trace Parkway, Austin, Texas 78727. Licensed by the Department of Corporations under the California Residential Mortgage Lending Act (916) 227-0931, License # 4130364. Not an offer to enter into an interest rate or discount point agreement under Minnesota Statute 47.206.
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