Mortgage-Related Closing Costs – Depending on your situation, the following costs for getting a mortgage must be paid at or before the closing. These costs cover items which are part of the loan application process:
Loan Origination Fee – The loan origination fee covers the administrative costs of processing the loan. It may be expressed as a percentage associated with the loan amount (i.e. one percent of the mortgage amount).
Loan Discount Points – Loan discount points are the dollar amount paid to a lender for making a loan. Each point equals 1 percent of the mortgage amount. For example, if you take out a $100,000 loan, one point equals $1,000.The more points you are willing and able to pay at closing, the lower your interest rate would be.
Appraisal Fee – An appraisal is a professional opinion, usually written, of the market value of the home you are buying. The lender uses the appraisal to determine whether the value of the property is sufficient to secure the loan should a default occur on the loan. This expense is usually paid when you apply for the mortgage and it may appear on the closing statement as “POC,” or “paid outside closing.”
Credit Report Fee – The credit report fee covers the cost of the credit report, which the lender uses to determine your credit worthiness. You probably also paid this fee when you applied for the mortgage, so it may appear on the settlement form as POC.
Prepaid Interest and Principal – You will probably have to pay the interest and principal of the mortgage from the date of closing to the beginning of the period covered by the first monthly mortgage payment.(For example, suppose you close on March 12th.At the closing you will probably be required to prepay the interest and principal for the period from March 12th to the end of the month. When your next payment is made, you are actually paying the interest for the preceding month (mortgage interest and principal payments are made in arrears).
Escrow Accounts – Escrow accounts (or reserves) will be required if your lender will be paying your homeowner’s insurance and property taxes. Your lender may set up the escrow account by adding the amount of insurance policy and taxes to your monthly mortgage payments. This portion of your payment is kept in reserve until the bills are due. Each year, the property tax and insurance bills will be sent directly to your lender, who will make the payment for you.
Local Property Taxes – Property taxes for the real estate you own must be paid annually to the local government. Property taxes are prorated between the buyer and seller. This splitting of the taxes will be done by the Title Company and/or attorney.
Homeowner’s Insurance – Your lender will require you to pay at least one year’s premium in advance, at the closing.