Closing Costs

Closing costs refer to all of the additional fees and taxes associated with closing a home loan. The amount of closing costs you will be required to pay can vary significantly, depending on the lender, type of mortgage, and location of the property. Closing costs generally fall into one of three categories: Out-of-pocket expenses, pre-paid items and points.

Out-of-pocket expenses include fees for third-party services, such as appraisals, attorney fees, credit reports, and title searches.

Prepaid items can vary, depending on the type of property you are purchasing and the settlement date, but generally include a certain number of months' worth of homeowners insurance (unless the property is a condominium) and property taxes. Most lenders require borrowers to pay their real estate taxes and homeowners insurance through the use of an escrow account established by the lender for that specific purpose. With an escrow account, instead of paying your entire homeowners insurance premium or property tax bill every six or twelve months, you pay a portion of the cost as part of your monthly mortgage payment. This helps you avoid the hassle of planning for large lump sum payments, while reassuring the lender that your taxes and insurance will be paid on time.

Points are fees, with each point representing 1% of your loan amount. There are two kinds of points, origination and discount:

• Origination points are fees charged by the lender for making, or "originating", a loan. Simply put, any origination points you pay typically represent additional profit for the lender.
• Discount points allow you to buy down your interest rate. In other words, in return for paying one or more points upfront, you can receive a lower interest rate on your loan, thereby reducing your monthly payments.

When comparing lenders and mortgage programs, make sure you compare "apples to apples". Make sure that the rates quoted by each lender all have the same number of points, and that you compare the total closing costs charged by each lender.