Financing-Related Closing Costs
These are fees that are only incurred if the buyer is obtaining a mortgage. The financing related closing costs can be very variable, and it is difficult to give any sort of estimate for the total for that reason.
For example, if the loan is negotiated to include "points" to reduce the interest rate of the mortgage, then each point is equivalent to 1% of the loan amount. This makes a big difference to the total financing costs.
In the absence of points, financing-related closing costs may typically work out at 2 to 4% of the loan amount. These costs are not all 'lost'. Some of them, such as escrow payments and initial interest payment, are advance payments for mortgage servicing costs that would be required eventually anyway.
Because there are big variations in the bottom line for financing related closing costs, buyers are advised to consider several sources of financing and to take a careful look at the costs of each, as set out in the lender's good faith estimate, before making a decision as to which to go with. In particular, compare charges that the lender makes for his own benefit, such as the loan origination fee.
At closing, a sum may be added to closing costs to start up an escrow account if the lender is paying home insurance, property taxes and/or other expenses out of the escrow account.
It is not unusual for a lender to also require that the borrower can show a minimum of six months of mortgage repayments as available funds in a US back account at closing.
The buyer needs to be aware that this requirement may be applied, but also that these funds can be withdrawn and used for other purposes after closing. They just have to be in place up to closing. After that, they are no longer required.
Loan Origination Fee
This covers the administrative expenses in setting-up and processing the loan. The loan origination fee may be either a fixed amount or a percentage of the mortgage amount.
The buyer may pay points to lower the interest rate at which the loan will be repaid. Each point equals 1 percent of the mortgage amount.
The fee for having the house appraised may be incorporated into the closing costs or payment may be required by the lender at the time the loan application is submitted.
The lender uses a credit report to determine the creditworthiness of the loan applicant. This fee is often paid when the loan application is submitted.
The buyer is required to pay interest on the mortgage loan to cover the time between the closing date and when the first mortgage payment period begins.
Private Mortgage Insurance (PMI)
Insurance required for conventional mortgage loans when the borrower's down payment on the house is less than 20 percent of the loan value.
Documentary stamps and tax on mortgage
This is covered in the section on general closing costs.