What are Closing Costs?       
Descriptions, Breakdowns, and How they Can Be Paid

A number of parties are involved in the process of buying a house. They include the lender, appraiser, insurance company, your local government, realtors, inspectors, and an attorney or title company.

Each of these parties charge fees for their service in processing and funding your loan. The Lender's responsibility is to explain to you what the services and costs are, and to give you an estimate of the total costs when you apply for a loan. This estimate comes in the form of a document titled Good Faith Estimate of Closing Costs. It is only an estimate, but it should be very close to your actual costs. We are not allowed to pad, or add onto the costs charged by these other parties, but rather simply pass on what they charge. The vast majority of closing costs go to third parties, not your actual lender. An exact breakdown and description of closing cost charges are at the end of this web page.

Lenders and brokers are required by Federal law, known as the Real Estate Settlement Procedures Act (RESPA) to give you a booklet called "Shopping for your home loan - HUD's Settlement Costs Booklet" when applying for a mortgage loan. If they didn't give you one, what are they trying to hide?

How to Compare Costs   
Shopping is confusing. No matter what we're looking for -- from cars to refrigerators -- there's a built-in element of confusion. Why? Lack of knowledge. An unfortunate rule of thumb is that the less we know about something we need to buy, the more we can expect to pay for it.

Shopping for a mortgage in Minneapolis, St Paul, Rochester, Duluth, Madison, Milwaukee, or all of Minnesota or Wisconsin is complex at best -- even for the savvy previous home owner. Daily rate changes, time-sensitive lock-in periods, points, lender's fees... plus the emotional element of probably the largest purchase any of us will ever make. Throw in to this already murky stew the ingredients of tricky rate advertising, commissions for every officer, agent and broker who 'helps' in your transaction, and the obscure differences between rates and fees. It's no mystery that many people settle for a mortgage that exceeds their monetary means out of sheer exasperation!

So, what can we do? The answer is education. If we know how to shop for a mortgage -- the questions to ask, the language to speak, the tools to employ -- we then possess the knowledge to secure the best deal.

The following is a simple primer to shine a light of clarity into the darker corners of mortgage lending. Read everything, familiarize yourself with the terminology -- and see how easy it is to secure the best possible mortgage with the lowest possible costs for you MN or WI home loan.

Avoid the #1 Mistake when Buying a Home Read Report

Best Rate or Lowest Costs?           
A common mistake shoppers make is to ask: "What's your best rate?." It is a logical question to ask, but does not give the response most borrowers need to make a proper decision. Borrowers must understand both rates and fees. Rates are only half the answer to getting the best deal. It is possible end up with the lowest rate but not necessarily the best deal.

Simply put, the lowest rate & the lowest fees do not go hand-in-hand. NO LENDER can offer both together. I can give you rock bottom rates, but it will cost you in fees. I can give you the lowest fees, but it will cost you in interest rate. Most lenders quote their best rate in combination with covering all third party fees (appraisal, credit report, title company, state taxes, county recording fees, etc) with 1% origination.

The COMPLETE Home Buyers Guide to Financing Your Home  Understanding Your FICO Credit Score  Knowing and Understanding Your Credit  #1 Mistake People Make When Buying a Home

CONFUSED? - be sure to read these other articles: Beware Of The BAD Good Faith Estimate Tricky Quotes - How to avoid them Protecting yourself against mortgage scams and screw-ups ZERO Cost Loans - The real story Thinking of breaking a rate lock? Best Rate or Lowest Cost - How to decide? You may be surprised Interactive Good Faith Estimate - View, read, learn

The question you should ask is: "Which lender is going to charge me the least amount of money for the rate I want?"

Understanding Fees
Fees could be broken down into four categories:

• Discount Points and Origination fees -- Convert these fees into dollar figures to better understand associated costs. For example: One point is 1% of the value of the loan. A discount point or origination fee of one point would equate to $1000 on a $100,000 loan.

• Appraisal, credit report and county/state fees -- These fees do not vary greatly between lenders, but they do vary. Also, you should never ever pay an application fee! The most you should pay a lender 'up-front' is a credit report fee, and that should never exceed $55.00. Paying up-front for your APPRAISAL is also OK.

• Miscellaneous lender charges (application fee, broker fee, funding fee, wire transfer fee, etc.) -- These are the categories where most lenders hide their fees.

• Title/settlement charges-- Include title search, closing fee, survey, title insurance, etc. These fees are paid to a separate company from the lender, so in theory they should be excluded from a lender-to-lender comparison. You should keep in mind that these charges will need to be paid in connection with the loan.

Step-by-step process to get the "Best Deal"              

• Pick the program that best suits your needs.

• Next, YOU choose the rate YOU want. By choosing the rate first you eliminate one giant shopping variable. You now can find out exactly which lender is charging you the least amount of money for the loan that you want.

• Closing Costs / Lender Fee's. PAY CLOSE ATTENTION. Many lenders will give you a ridiculous number that has no bearing on your real total costs by saying "OUR closing costs" or "OUR lender fee's" are X amount. Ask instead for the "bottom line", the "total amount required to complete the transaction", or even "what is the exact penny I will need to bring to closing?" By asking in this manner, you eliminate 99% of the misleading games some lenders play in attempting to make their costs sound so much better than everyone else. Please review the actual closing cost information listed below. Read Beware of the Bad Good Faith Estimate for more details.

• Ask the lender for a "Good Faith Estimate (GFE)" of settlement charges to verify if they are willing to put their pricing claim in writing. If they are not - RUN! Make sure to tell them you want ALL costs from ALL sources involved in the transaction listed on the estimate. You do not want anything listed TBD (to be determined).

• Review each Good Faith Estimate very carefully, especially if the estimate does not look exactly like a real final settlement statement (known as a HUD-1). Double check to make sure that EVERY cost associated with your loan is listed. All REAL competitive estimates should be very close in total dollar amount! All Mortgages Unlimited Good Faith Estimates will ALWAYS include every single dollar required to complete the transaction.

• Still Confused? Fax or call me a copy of the other lenders Good Faith Estimate. I will be happy to review it with you. If it is a good estimate, I'll be the first to tell you. If it is a bad estimate, I'll help you understand how and why it is a bad estimate.

Will my estimated closing costs differ from the actual costs?              
Yes. In standard transactions, the difference between estimated and actual closing costs will vary. Any variances should not normally be a cause for concern if it is small. The final numbers should be very close if you were given a good, Good Faith Estimate. If you have questions about specific costs, call your loan officer. These differences between estimated and actual costs are a common source of confusion and frustration for borrowers. The main reasons for the difference between the estimated and actual costs are as follows:

• Different investors charge different fees for processing your loan application. Therefore, your choice of a loan product will determine the actual investor’s origination cost, administrative fees, etc. Since you normally receive the Good Faith Estimate before you lock in a loan, our fees can only be an estimates. But they should still be close.

• Your prepayment amount may vary. On a purchase, you might have to prepay certain expenses. To protect the collateral on their loan against your house, most lenders require you to prepay a year’s worth of insurance, as well as some property taxes up front. These amounts will vary and depend on many things, including the type of insurance you choose. You will also have to pay "days of interest" depending on what day of the month you close. This amount can vary greatly. We usually have no idea what day of the month you will be closing, so these costs are only estimated.

• When you close. Pre-paid tax escrows vary greatly depending on the month you close. If we originally estimated your closing for January 25th, but you really close March 5th, the differences could easily be several hundred dollars.

• Other fees may vary depending on which investor provides services for your application. For example, different title companies and appraisers have slightly different fee schedules, although they should be very close.

How do I pay closing costs?                 
Early on in the process you may write a check to the lender for an appraisal and credit report. At the end of the process, you may write a check to your title company to cover the difference of all the costs associated with the loan that could not be added to your existing loan. The title company will then transfer payments as appropriate to the other parties involved, including the lender, the insurance company, the local government, etc.

This breakdown accurate for MINNESOTA only (where we do 90% of our business).
Other states may vary. For example, Florida has significantly higher state taxes (call for estimates)

Estimated Closing Cost Expense Worksheet  - Assumes a MINNESOTA transaction. These costs can be significantly LOWER. Lender can simply lower costs by increasing your interest rate. These costs can be significantly HIGHER. If you are getting a really low rate, they have to make it up somewhere! READ "Best Rate or Lowest Cost" for more information, and get a TOTAL COST ANALYSIS to determine the best OVERALL deal.
1.  Loan Origination Fee	1% of the loan amount for most loans. Believe me, you are paying this if it is on the estimate or not!
2.  Discount "Points"	A percentage of the loan amount (i.e. - 1 "Point" = 1% of the loan amount. Points are monies paid up-front to lower your interest rate.
3.  Credit Report	Normally $2.50 - $55.00. Depends on what type of credit you have. Average is about $20.00
4.  Appraisal Fee	Normally anticipate about $350 for conventional loans and FHA loans. Higher for 2-4 unit properties. Higher for JUMBO loans.
5.  Underwriting	Varies. Figure $350-$600. Typically Higher for FHA, VA.
6.  Processing	Varies. Figure $300-$600.
7.  Title Insurance	Varies, depending on type of loan (purchase/refinance), loan amount, etc. Lenders policy is required. Owners policy is optional. Call our loan officers or title company for exact quote.
8.  Plat Drawing Inspection	$60.00
9.  County Recording Fees	$50.00 or more.
10.  Flood Certification	$20.00
11.  Name and Assessment Searches	$24.00
12.  ARM Title Insurance Endorsement Fee	$50.00
13.  Mortgage Registration Tax / DEED / State taxes	$2.30 per $1,000 of the loan amount in Minnesota. Check with your individual states for various deed taxes, transfer taxes, state and county taxes.
14.  Closing Fee. This fee is paid to the title company.	Normally about $275.00. See above. There are a lot more fees paid to the title company than the closing fee. NOTE: see #'s 7,8, 9, 11, 12
15.  Misc. Fee's	Varies, but figure about $350.00. This includes things like courier fees, etc.
16.  Prepaid Interim Interest. Also known as "Days of Interest"	We recommend one full months interest be estimated. (Loan amount x interest rate = annual interest, divided by 12 months = monthly interest). Assumption: If closing occurs on the 20th of the month the buyer will be required to pay 10 days of interest at closing.
17.  Homeowners Insurance Premium (1st year)	An estimate of the annual premium may be computed by multiplying the purchase price by about $4.00 per one thousand. This is purchased separately, prior to closing. Contact your Insurance agent for quotes. NOTE: See item #19 also.
18.  Private Mortgage Insurance Premium (PMI)	The amount varies depending down payment & loan program. The smaller the down payment, the higher mortgage insurance costs. Generally, PMI is not required if the buyer is making a 20% down payment. Contact your loan officer for a quote.
19.  Homeowners Insurance	At least two months are collected at closing to open the escrow account for a purchase loan (maybe higher for a refinance). This amount is in addition to the one year policy paid for in advance by the buyer prior to closing on a new home.
20.  Property Taxes	In most situations, at least two months, and up to 7 months of the annual property taxes must be escrowed to open the escrow account. The amount collected depends on what month you close your loan. In addition, any pro-rated taxes must also be considered. Please contact us to obtain the exact figure. Click here to determine how much tax escrow will be collected at closing!
21. Flood Insurance	This will be required if the property is located in a designated flood zone. The 1st year premium would be required along with at least two months estimated premium for the escrow account.