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Understanding loan closing costs

When you are looking at your checkbook trying to decide how much money you can put down on a real estate purchase. don’t forget the other fact of life when it comes to getting a loan.

That fact is that you will (one way or the other) have to pay for loan closing costs. Many people point out to me that there aren’t any closing costs when they take out a small bank loan or buy a car, so why are there closing costs on a mortgage?

The answer is simple, really. Time is money and there is far more to processing a mortgage loan than most people realize. A recent study by a mortgage trade group shows that on the average 21 individuals work on a loan application in the process of securing loan approval. Paying these people, providing them with computers, offices, phone lines, postage, fax machines and the like costs a lot of money, and as in any business those costs get passed onto the consumer.

When you apply for a loan the lender is required to give you a written document called a “Good Faith Estimate of Closing Costs.” This document lists items such as costs of appraisals, credit reports, title insurance, underwriting, tax service fees, processing fees, filing fees and transfer taxes. Look at this document carefully as costs between lenders can vary greatly.

Probably the most frequently asked question about closing costs involves title insurance. Many customers ask why they need this, because after all they hold the deed to the property and they got a title policy from the seller at closing.

The nature of title insurance is that the policy you get at closing on your purchase insures you against future challenges to the title but it does not insure your lender.

In the event of a future problem (such as an old lien showing up on the title that wasn’t found originally) your lender faces quite a different set of problems than you do. You would still own the house and you may not have to deal with the lien until you sell the property. Your lender on the other hand may find that he suddenly has a second mortgage instead of the first mortgage he thought he had.

Also, if at sometime in the past the property had been fraudulently sold and the real owner shows up, your title policy might reimburse you for costs of defending your position but would not cover the lender’s exposure. With the proper title insurance in place both parties are covered. Without proper title insurance you and the lender could be out of the property and the lender would still ask you to repay the loan. Unfortunately title insurance is written to cover only a specific loan, so you must repurchase it each time you refinance.

Another cost is the appraisal. This is a simple one: your lender wants a disinterested third-party to value the property to be sure that the value is there for collateral.

Many people wonder why a mortgage credit report costs so much (currently about $25). After all, a consumer can get a copy for free. The answer lies in that under federal lending regulations we are required to get reports from all three bureaus merged into one, and we get data that will not show on the consumer disclosure such as your FICO (or credit) score. We are also required to use a disinterested third-party company to assemble this information. Thus we have to hire a service to do this, and it costs what it costs.

Processing and underwriting fees are often questioned as well. The mortgage broker who originates the loan employs several people to process the loan as it moves through the system. These people order the title work, appraisal, etc. and verify the applicant’s employment and assets. This is a very time-consuming part of the loan. While our processing department actually costs us about $600 per loan to operate, we only charge the consumer about half that amount on an itemized basis.

Underwriting fees are similar to processing except they are imposed by the institution the broker chooses to sell the loan to upon closing, and are charged to cover the cost of processing and approving the loan from the investor’s side.

Filing fees are fees paid to the county clerk to record the deed of trust against the property. The tax stamp is a fee imposed by the county on a sale of the property. On a $100,000 transaction this would be $10.

Depending on the interest rate you’re paying, you may be charged points on the loan. There are two kinds of points, origination points and discount points. A point is 1 percent of the loan amount. An origination fee is usually one point. This goes to pay the loan officer who originated the loan (though he splits that with his employer). Discount points can vary in number and serve to secure a lower rate.

Some lenders advertise loans with no closing costs, but what they do is charge you a higher interest rate so they can make it back in the interest rate. These work well in certain instances, but generally are in the lender’s favor, not yours.

Chris Neuswanger is a loan officer with Macro Financial in Avon and can be reached at 970-748-0342. He welcomes mortgage-related inquiries from readers.

Vail, Colorado


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