Mortgage settlement--sometimes called
mortgage closing--can be confusing. A settlement may involve
several people and many documents and fees. This information
will help you understand all that is involved. Although the
focus of this guide is on settlements for home purchases, much
of it will also be useful if you are refinancing a mortgage.
Settlement costs can be high, so it pays
to shop around and negotiate with the seller, your lender, and
your attorney or settlement agent. The less you have to pay in
settlement costs, the more funds you will have for other things.
Different regions have different customs
and practices regarding who pays for what at settlement. Buyers
and sellers are free to negotiate certain fees. In slow-moving
real estate markets, the seller may agree to pay points or fees
for the buyer. In fast-moving markets, the buyer may have to
agree to pay more costs to close the deal. Whatever you
negotiate will become the sales contract. However, be careful;
if some buyer’s costs are shifted to the seller, it may increase
the price you pay for the property.
You can reduce some settlement costs by
shopping around for the services. The point is this: the more
you know about the process, the better your chances are for
saving money at settlement time.
Because practices vary significantly
from area to area, it is difficult to provide estimates for
settlement costs that fit everywhere. However, one rule of thumb
for buyers is to figure that settlement costs will be about 3%
of the price of your home. In some relatively high-tax areas of
the country, 5% to 6% is more common.
Some settlement costs, such as
homeowner’s insurance, private mortgage insurance, or points can
be more expensive if your credit rating is low. Knowing your
credit score can help you understand how lenders will evaluate
your applications. Beginning December 2004 your lender is
required to give you a copy of your credit score.
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Mortgage- and Lender-Related
Settlement Costs
Most people associate settlement costs
with mortgage loan charges. These fees and charges vary, so it
pays to shop around for the best combination of mortgage terms
and settlement costs. Mortgage-related costs that may apply to
your loan include the following items.
Application fee
Imposed by your lender or broker, this
charge covers the initial costs of processing your loan request
and checking your credit report.
Estimated cost: $75
to $300, including the cost of the credit report for each
applicant
Loan origination fee
The origination fee (also called
underwriting fee, administrative fee, or processing fee) is
charged for the lender’s work in evaluating and preparing your
mortgage loan. This fee can cover the lender’s attorney’s fees,
document preparation costs, notary fees, and so forth.
Estimated cost: 1% to
1.5% of the loan amount
Points
Points are a one-time charge imposed by
the lender, usually to reduce the interest rate of your loan.
One point equals 1% of the loan amount. For example, 1 point on
a $100,000 loan would be $1,000. In some cases--especially in
refinancing--the points can be financed by adding them to the
amount that you borrow. However, if you pay the points at
settlement, they are deductible on your income taxes in the year
they are paid (different deduction rules apply when you
refinance or purchase a second home). In your purchase offer,
you may want to negotiate with the seller to have the seller pay
your points.
Estimated cost: 0% to
3% of the loan amount
Appraisal fee
Lenders want to be sure that the
property is worth at least as much as the loan amount. This fee
pays for an appraisal of the home you want to purchase or
refinance. Some lenders and brokers include the appraisal fee as
part of the application fee; you can ask the lender for a copy
of your appraisal. If you are refinancing and you have had a
recent appraisal, some lenders may waive the requirement for a
new appraisal.
Estimated cost: $300
to $700
Lender-required home
inspection fees
The lender may require a termite
inspection and an analysis of the structural condition of the
property by an engineer or consultant. In rural areas, lenders
may require a septic system test and a water test to make sure
the well and water system will maintain an adequate supply of
water for the house (this is usually a test for quantity, not
for water quality; your county health department may require a
water quality test as well, but this test may be paid for
outside of the settlement). Keep in mind that this inspection is
for the benefit of the lender; you may want to request your own
inspection to make sure the property is in good condition.
Estimated costs: $175
to $350
Prepaid interest
Your first regular mortgage payment is
usually due about 6 to 8 weeks after you settle (for example, if
you settle in August, your first regular payment will be due on
October 1; the October payment covers the cost of borrowing the
money for the month of September). Interest costs, however,
start as soon as you settle. The lender will calculate how much
interest you owe for the part of the month in which you settle
(for example, if you settle on August 16, you would owe interest
for 15 days--August 16 through 31).
Estimated cost:
Depends on loan amount, interest rate, and the number of days
that must be paid for (a $120,000 loan at 6% for 15 days, about
$300; a $142,500 loan at 6% for 15 days, about $356).
Private mortgage insurance
(Private MI)
If your down payment is less than 20% of
the value of the house, the lender will usually require mortgage
insurance. The insurance policy covers the lender’s risk in the
event that you do not make the loan payments. Typically, you
will pay a monthly premium along with each month’s mortgage
payment. Your private MI can be canceled at your request, in
writing, when your reach 20% equity in your home, based on your
original purchase price, if your mortgage payments are current
and you have a good payment history. By federal law your private
MI payments will automatically stop when you acquire 22% equity
in your home, based on the original appraised value of the
house, as long as your mortgage payments are current.
Estimated cost: 0.5%
to 1.5% of the loan amount to pre-pay for the first year
Some lenders will pay for private
MI--called lender’s private mortgage insurance (LPMI)--and in
turn will charge a higher interest rate. Unlike private MI that
you pay, there is no automatic cancellation once you acquire 22%
equity. To eliminate the LPMI, you must refinance the loan,
which in turn means carefully considering market interest rates
and settlement costs at the time to see if refinancing would be
an advantage, rather than keeping your current mortgage.
FHA, VA, or RHS fees
The Federal Housing Administration (FHA)
offers insured mortgages and the Veterans Administration (VA)
and the Rural Housing Service (RHS) offer mortgage guarantees.
If you are getting a mortgage insured by the FHA or guaranteed
by the VA or the RHS, you will have to pay FHA mortgage
insurance premiums or VA or RHS guarantee fees. As with Private
MI, insurance premium payments will stop when you acquire 22%
equity in your home. FHA fees are about 1.5% of the loan amount.
VA guarantee fees range from 1.25% to 2% of the loan amount,
depending on the size of your down payment (the higher your down
payment, the lower the fee percentage). RHS fees are 1.75% of
the loan amount.
Homeowner’s insurance
Your lender will require that you have a
homeowner’s insurance policy (sometimes called hazard insurance)
in effect at settlement. The policy protects against physical
damage to the house by fire, wind, vandalism, and other causes.
This insures that the lender’s investment will be secured even
if the house is destroyed. If you are buying a condominium, the
hazard insurance may be part of your monthly condominium fee;
you may still want homeowner’s insurance for your furnishings
and valuables.
Estimated cost: $300
to $1,000 (depending on the value of the home and the amount of
coverage; you can estimate the cost to be about $3.50 per $1,000
of the purchase price of the home).
Flood determination fee
If your home is in a flood hazard area
where federally subsidized flood insurance is available, lenders
cannot make a mortgage loan for your home unless you buy flood
insurance. Your lender may charge a fee to find out whether the
home is in a flood hazard area.
Estimated cost: $15
to $50 (this is not the cost for the flood insurance; flood
insurance, if required, would be in addition to your homeowners
insurance and may cost from $350 to $2,800 depending on location
and property value)
Escrow (or reserve) funds
Some lenders require that you set aside
money in an escrow (reserve) account to pay for property taxes,
homeowner’s insurance, and flood insurance (if you need it).
Lenders use escrow funds to ensure that these items are paid on
time to protect their interest in your home. With an escrow
account, money is held by the lender or the lender’s agent, who
then pays the taxes and insurance bills when they are due. At
settlement, you may need to provide some payment into this
account, depending on when payments will be due. For example, if
you are buying your home in August and property taxes are due
the following January, you will need to deposit funds into your
escrow account at settlement so that you have enough to pay the
taxes when they become due in January.
Survey costs
Lenders require a survey to confirm the
location of buildings and improvements on the land. Some lenders
require a complete (and more costly) survey to ensure that the
house and other structures are legally where you and the seller
say they are.
Estimated cost: $150
to $400
Other miscellaneous
settlement costs
Depending upon the location and type of
property, and the extra services you or your lender request, you
may also have to pay some of the following fees at settlement:
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Assumption fee. If you are assuming (or
taking over) an existing mortgage, the lender may charge
a fee.
Estimated cost: Depends on
the lender, but will range from several hundred dollars
to 1% of the amount of the loan you are assuming
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Expenses prorated between the seller and the
buyer. In your purchase contract, you may agree
to split some costs with the seller. In addition to
prorated property taxes, some of these expenses may
involve large amounts. For example, annual condominium
fees, homeowners’ association fees, water bills, and
other lump-sum service charges may be split between you
and the seller to cover your respective periods of
ownership for the calendar year or tax period.
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Inspections. As a buyer, if you make
your purchase offer contingent on the results of a home
inspection--such as testing for structural damage, water
quality, and radon gas emissions--you will have to pay
for these inspections. |
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Escrow account funds. In the purchase
contract, you can request that the seller set up an
escrow account to cover any costs for repairs, radon
mitigation, house painting, or other items. For example,
if you have not had a chance to test all the appliances
(for instance, if you buy in the summer, you may not
test the furnace), you may request an escrow account to
cover repairs if they are needed in the future. The
seller may agree to split the costs with you, in which
case you would need these funds at settlement.
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Fees paid to find a lender. As a buyer,
you may work with a mortgage broker or other third party
to find a mortgage loan. For example, you may want to
work with a broker to find a loan with nonstandard terms
or conditions. Brokers arrange transactions rather than
lending money directly; in other words, they find a
lender for you. Brokers will generally contact several
lenders regarding your application, but they are not
obligated to find the best deal for you unless they have
contracted with you to act as your agent.
Estimated cost: Depends on
agreement with the broker; can range from no fee to a
percentage of the loan amount |
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Charges for Establishing and
Transferring Ownership
Title search
The goal of a title search is to assure
you and your lender that the seller is the legal owner of the
property and that there are no outstanding claims or liens
against the property that you are buying. The title search may
be performed by a lawyer, an escrow or title company, or other
specialist.
Public real estate records can be spread
among several local government offices, including surveyors,
county courts, tax assessors, and recorders of deeds. Liens,
records of deaths, divorces, court judgments, and contests over
wills--all of which can affect ownership rights--must also be
examined.
If real estate records are computerized,
the title search can be completed fairly quickly. In some cases,
however, the title search may involve visiting courthouses and
examining other public records and files, which is more
time-consuming.
Title insurance
Most lenders require a title insurance
policy. This policy insures the lender against an error in the
results of the title search. If a problem arises, the insurance
covers the lender’s investment in your mortgage.
The cost of the policy (a one-time
premium) is usually based on the loan amount and is often paid
by the buyer. However, you may negotiate with the seller to pay
all or part of the premium.
The title insurance required by the
lender protects only the lender. To protect yourself against
title problems, you may want to buy an “owner’s” title insurance
policy. Normally the additional premium cost is based on the
cost of the lender’s policy, but this premium can vary from area
to area.
Some advice on keeping title insurance
costs low: If the house you are buying was owned by the seller
for only a few years, check with the seller’s title company. You
may be able to get a “re-issue rate,” because the time between
title searches was short. As well, if you are refinancing, you
may be able to get a “re-issue rate” on your title insurance.
The premium is likely to be lower than the regular rate for a
new policy. If no claims have been made against the title since
the previous title search was done, the insurer may consider the
property to be a lower insurance risk.
Usually you will have to buy title
insurance from a company acceptable to your lender. However, you
can still shop around for the best premium rates (which can vary
depending on how much competition there is in a market area). If
you decide to buy an “owner’s title policy,” look for one with
as few exclusions from coverage as possible. Exclusions are
listed in each policy, and if a policy has many exclusions--that
is, situations under which the insurer will not pay for your
title problems--you may end up with little coverage. The
estimated cost of title services and title insurance varies by
state. For example, a lender’s policy on a $100,000 loan can
range from $175 in one state to $900 in another. In some states,
the price can even vary by county.
Settlement companies and
others conducting the settlement
Settlements are conducted by title
insurance companies, real estate brokers, lending institutions,
escrow companies, or attorneys. In most cases, the settlement
agent is providing a service to the lender, and you may be
required to pay for these services. You can also hire your own
attorney to represent you at all stages of the transaction,
including settlement.
You may be involved in some of the
closing activities and not in others, depending on local
practices and on the professionals with whom you are working. In
some regions, all the people involved in the sale--the buyer;
the seller; the lender; the real estate agents; attorneys for
the buyer, seller, and lender; and representatives from the
title firm--may meet to sign forms and transfer funds. In other
regions, settlement is handled by a title or escrow firm that
collects all the funding, paperwork, and signatures and makes
the necessary disbursements. The firm delivers the check to the
seller and the house keys to you.
Costs for settlement services vary
widely, depending on the professional services involved.
Regardless of the way settlement is handled in your region, shop
around and ask for information on all services provided and all
fees charged.
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Amounts Paid to State and Local
Governments
In some parts of the country transfer
and recording fees are low. In other parts of the country costs
of transfer fees, recording fees, and property taxes collected
by local and state governments may be as much as 1.25% of the
loan amount. Some of these fees, such as the recording fee and
transfer fee, are one-time fees. Although there is no way to
avoid paying these fees and taxes, you may be able to negotiate
with the seller to pay some of these costs. But remember, you
must include these terms as part of the purchase offer for the
property.
Amounts for property taxes may go into
an escrow account. The amount you will need depends on when
property taxes are due and the timing of the settlement. The
lender should be able to give you an approximation of these
costs at the time you apply for the mortgage.
“All-in-One” Pricing of
Settlement Costs
Some lenders have bundled most of their
settlement costs into a single price. Generally, they combine
the following fees:
application
origination
underwriting and
processing
points
pest inspection
appraisal
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credit reports
lender’s attorney
flood certification
title search and
title insurance
recording
and fees for other
tax services |
This all-in-one price, however, does not
include all of the fees needed at settlement. You will also need
funds for the following:
prepaid interest (based on the day of the month you settle)
mortgage and transfer taxes
(determined by your state or local taxing agency)
private mortgage insurance
(if needed)
homeowners (hazard) insurance
flood insurance (if needed)
and reserve (or escrow) funds
for property taxes and homeowners insurance.
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Estimates of Settlement Costs
At various points in your loan
application process, you are entitled to get estimates of the
costs and fees associated with getting a mortgage and going
through settlement.
The “good faith estimate”
With such a long list of potential
charges at settlement, it is important to know what to expect.
The Real Estate Settlement Procedures Act (RESPA) requires your
mortgage lender to give you a “good faith estimate” of all your
closing costs within 3 business days of submitting your
application for a loan, whether you are purchasing or
refinancing the home. This is a good faith estimate, but the
actual expenses at closing may be somewhat different. If you are
purchasing the home, you will also get an information booklet,
Buying Your Home: Settlement Costs and Helpful Information.
Truth in lending information
For home purchases, the lender is
required, under the Truth in Lending Act, to provide a statement
containing “good faith estimates” of the costs of the loan
within 3 business days of submitting your application. This
estimate will include your total finance charge and the annual
percentage rate (APR). The APR expresses the cost of your loan
as an annual rate. This rate is likely to be higher than the
stated contract interest rate on your mortgage because it takes
into account discount points, mortgage insurance, and certain
other fees that add to the cost of your loan. When refinancing
your mortgage, you will receive the truth in lending disclosures
before you settle.
The “HUD-1” statement
When you purchase a home or refinance
your mortgage, the Real Estate Settlement Procedures Act also
requires the lender to give you a copy of the HUD-1 or HUD-1A
Settlement Statement 1 day before you go to settlement, if you
request it. This final statement of settlement costs will show
all the fees and charges you will be expected to pay at
settlement.
Fees paid outside of
settlement
Some fees may be listed on the HUD-1 and
marked as “Paid Outside of Closing” (or “POC”). You will pay
some of these fees, such as for credit reports and appraisals,
before settlement. Other fees, such as those to a mortgage
broker, you will pay at settlement.
Sample Settlement Costs
Because costs may vary from one area to
another and from one lender to another, the following example is
an estimate only. This example is based on a $150,000 home with
a 5% or a 20% down payment. Excluding reserves for property
taxes and down payment, settlement costs for the 5% down payment
loan vary between $4,690 and $13,940; settlement costs for the
20% down payment loan vary between $4,285 and $12,060. Your
costs may be higher or lower than the examples below.
Item |
Typical range
(percent except
as noted) |
Estimate for
$150,000 house
(in dollars except as noted) |
5% down
payment |
20% down
payment |
Down Payment |
-- |
7,500 |
30,000 |
Mortgage amount |
-- |
142,500 |
120,000 |
Items payable in
connection with the loan ("800" series on HUD-1 form) |
Application fee
(may include credit report fees) |
-- |
75 to 300 |
75 to 300 |
Loan origination
fee
(may also include underwriting fees, administrative
fees, lender's attourney fees, notary fees, and so on) |
1 to 1.5 of loan |
1,452 to 2,137 |
1,200 to 1,800 |
Points |
0 to 3 |
0 to 4,500 |
0 to 3,600 |
Appraisal fee |
-- |
350 to 700 |
350 to 700 |
Lender's
inspection fee |
-- |
175 to 350 |
175 to 350 |
Assumption fee (if
applicable) |
$300 to $1,000 |
-- |
-- |
Broker fee (if
applicable) |
1 |
1 |
1 |
Items payable in
advance ("900" series on HUD-1 form) |
Prepaid interest |
2 |
350 |
295 |
Homeowner's
insurance
(hazard insurance) |
$500 to $700 |
5253 |
5253 |
Flood
determination
(flood insurance, if needed, is additional) |
-- |
15 to 50 |
15 to 50 |
Reserves
(escrow) deposited with lender ("1000" series on HUD-1
form) |
Homeowners
insurance |
-- |
250 to 350 |
250 to 350 |
Private MI |
-- |
125 to 250 |
-- |
Property taxes |
4 |
-- |
-- |
Title charges
("1100" series on HUD-1 form) |
Title search and
lender's title insurance |
-- |
700 to 900 |
700 to 900 |
Owner's title
insurance |
-- |
-- |
-- |
Government
recording and tarnsfer fees ("1200" series on HUD-1
form) |
Recording fees for
deed, mortgage, city/county taxes, and state taxes |
0 to 1.5 of loan |
0 to 2,137 |
0 to 1,800 |
Additional
charges ("1300" series on HUD-1 form) |
Survey |
-- |
150 to 300 |
150 to 300 |
Pest inspection |
-- |
50 to 90 |
50 to 90 |
Settlement fees |
-- |
500 to 1,000 |
500 to 1,000 |
Other amounts
due from borrower ("100" series on HUD-1 form) |
Personal property;
assessments; prorated condominium fees; homeowners'
association fees; prorated taxes; fuel, oil, and
propane; and so forth |
5 |
5 |
5 |
Note:
"--" = not applicable |
1. |
May be a dollar
amount or a percentage.
Return to table |
2. |
Depends on
interest rate, the day of the month that settlement
takes place, and the amount borrowed. The example
assumes that there are 15 days left in the month and
that the interest rate on the loan amount is 6%.
Return to table |
3. |
These are the fees
if using $3.50 per $1,000 of purchase price as an
estimate. Return to
table |
4. |
Varies greatly and
depends on local tax rates.
Return to table |
5. |
These items vary
depending on your agreement with the seller.
Return to table |
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Settlement Cost Tips
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Think
about settlement fees before you submit your purchase
offer. |
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Remember many fees and charges are negotiable.
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Use
the Settlement Costs Worksheet and compare costs by
shopping among several lenders and brokers. |
This information has been prepared to
help you make the important decisions involved in buying and
financing your home. However it should not be viewed as a
replacement for professional advice. Talk with attorneys,
mortgage lenders, real estate agents, and other advisers for
information about lending practices, mortgage instruments, and
your own interests before you commit to a specific loan.
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