Closing costs are those charges assessed by the lender, title company, municipality, or real estate company at the time of closing to pay for the services needed to close the loan. These charges, while quoted by the lender, are not all assessed or determined by the lender. A competent lender should be very familiar with those charges a borrower should expect to encounter at closing. One of the biggest drawbacks to utilizing an out of state or web-based lender is their lack of familiarity with local practices and charges. While those lenders usually have some general knowledge of the regional differences they can’t be intimately versed on every area of the country. This frequently results in buyers finding charges at closing that were not disclosed initially by the lender. At that time there is usually not much you can do about the extra charges except pay them.
The costs you are most likely to see from a lender are appraisal, credit report, tax service and flood certification. Occasionally there will be an all encompassing fee such as a processing, administration or underwriting fee. This fee often covers a series of smaller costs associated with a loan without detailing the costs themselves. In some circumstances these fees are simply a way of generating additional revenue for the lender. If a particular fee seems too high ask the loan officer to explain what the fee covers. It also not a bad idea to look at the total of costs being assessed.
Typical title company charges include title insurance and closing fees. Since, in Michigan, the title company is responsible for the recording of some of the closing documents they will pass along the recording fees from the county. Also the title company is most commonly the party determining whether a survey is needed (although this is ordered by the lender). The title company also prepares some of the closing documents and is responsible for closing the loan so you will most likely encounter a closing fee. You may also run across miscellaneous title company fees such as overnight or courier fees, recording handling fees, email fees, wire fees, etc.
Unfortunately, most buyers don’t have a say in the title company and can end up charged a plethora of costs that would be considered “junk”. You can speak with your real estate agent about getting a list of the title company charges before the closing (or in some cases before entering into a contract for a home) so that you can be prepared for the charges. Another option to keep from paying excessive or unnecessary fees that you won’t find out about until a day or two before closing is to include a clause in your purchase contract stipulating the maximum you are willing to pay the title company for their services.
This way the seller or the seller’s realtor can arrange this with the title company prior to the closing. An experienced Realtor can tell you what is customary and typical for the area.
Points – This next part is where it gets a little complicated…
Lenders typically compute their income on a loan in percentages or “points”. A point is 1% of a loan amount. A lender who is making 1.5 points on a $100,000 loan is making $1500 (100,000 x 1.5% = 1,500). The lender sometimes has the opportunity to increase the percentage points it is making on a loan by increasing the interest rate. If the lender in our example charged an additional .25% in interest rate, they may make an additional 1 point ($1,000) on the loan. Knowing this information sometimes allows you to lower your closing costs or prepaids by selecting a higher interest rate. A lender who is making 2.5% on a $180,000 loan may be very willing to pay all or most of your closing costs.
If you are short on money or if you are not planning on keeping the mortgage for a very long time, be sure that you consider the option of raising your interest rate in lieu of a higher rate. At the same time a lender who is charging a lower rate may be making nothing on the loan or in fact may need to pay the additional money (points) to secure the lower interest rate for the customer. That additional cost for the money is passed on to the borrower in points that the borrower pays at closing. If you are planning on staying in the home for a long time, you may consider paying a point or two at closing in order to lower your interest rate over time.
When comparing mortgage companies’ closing costs I often suggest that you only compare those costs assesed by the mortgage company and leave out those assessed by outside parties. This allows you to compare only those costs from the lender and not the third party estimates that the lender can fudge with. At the same time, letting the lender provide you an estimate of all the costs will reveal a lot about the lender. If they are understimating the costs from the third parties in the transaction then I’d be wary about how they are representing other areas of their services and costs.
In addition to closing costs you will need to come up with what are termed “prepaids”. Prepaids are those items that are considered part of the loan’s recurring costs. There are four prepaids that you will find at most closings. You can read more about prepaids HERE.