Lender & Legal Fees

Closing costs are divided into a few different categories depending on what the cost is for.

Lender Fees and/or Origination Fees: These fees cover such things as underwriting & processing your loan, obtaining your credit report and, for some lenders, an application fee.

Points: This is pre-paid interest that can be utilized to obtain a lower interest rate. Each point is typically 1% of the loan amount. For example, on a $200,000 loan, 1 point would equal $2,000. So, you could have an option of (1) a 4% rate with no points, or (2) a 3.75% rate with 1 point. If you plan on being in your home for a long period of time, it may be worth at least considering paying points. A simple math calculation can help you determine the break-even point. Lowering your rate .25% on a $200,000 loan will save $30 per month. It cost $2,000 to get the lower rate. So you will need to be in the mortgage 66 months to be ahead of the game.

Pre-Paids: This is the money that the lender puts into an escrow account as a “reserve fund” to pay your real estate taxes and home owner’s insurance. Unless you plan on putting 20% down on your mortgage loan, current Fannie, Freddie, FHA, VA & USDA guidelines require you to set up an escrow account so that both taxes and insurance are paid within your monthly mortgage payment. Prepaid items will also include the daily interest the covers the time period from when you loan closes to the end of the month.

Mortgage Insurance: If your loan requires mortgage insurance (which it most likely will if you do not have 20% as a downpayment) it may be paid as lump sum up-front, monthly, or both. If you have an upfront mortgage insurance premium it would included in your pre-paid section of your paperwork. Also note, mortgage insurance is now tax deductible for most homeowners.

Legal Fees: This covers the cost for the attorney’s legal services. Itemized fees may include a settlement charge, title examination, closing fee & courier fees.

Title Insurance: Mortgage lender’s require that a lender title insurance policy be issued on all closed loans. The premiums are based on the amount of the loan at a rate of $2.50-$2.75/$1,000 borrowed here in Massachusetts. Owner’s title insurance, although not required, is highly recommended, and the premium is based on the purchase price of the property.

Recording Fees: Recording fees in Massachusetts are determined by the county in which the property is located. The Registry of Deeds charge for every document recorded. On a typical purchase in Mass., recording fees run somewhere around $400.

Plot Plans. Also called a mortgage inspection plan or tape survey. This is a rough estimate prepared by a surveyor of the property lines, location of the home, driveway, easements and outbuildings on the property. It is a good tool to find potential encroachment issues and easements prior to closing. These run from $125-$150.

“Zero Closing Cost Loans”. This doesn’t mean that the attorneys and the underwriters are going to work for free, so how do they get compensated? The simple answer is through the profit in the rate. Think of your rate and closing costs as a see-saw. The higher the rate the lower the closing costs and the lower the rate the higher the closing costs. Common sense tells you that if you pay a higher rate over the life of the loan, the bank will make more money. The bank can afford to pay for your closing costs if they will make more money on the loan.

For Example: You could choose a 4% interest rate with some standard closing costs OR you could go with a 4.375% interest rate with zero closing costs. It really comes down to whether or not it’s more important to you to have the lowest payment or the least amount of money out of pocket at closing. A higher rate makes the bank more money which is called “yield spread premium”.  So in other words a “zero closing cost” mortgage is just a mortgage with a higher rate than someone who opts to pay closing costs.