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Closing Costs Explained: 9 Fees to Watch for When You Buy a Home

February 14th, 2018 8:03 AM by Jackie A. Graves, President

What do all of those closing costs pay for?

When you get a mortgage and are ready to complete the purchase of your next home, reviewing your closing costs can feel like visiting a country where you don’t speak the language.

Inscrutable terms. Odd-sounding services. And a sizable menu of fees for things you don’t understand.

One bright spot: Many of these fees can be reduced or eliminated.

“The first thing you need to do is understand that some items here are movable and negotiable,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling.

Here are nine common closing costs explained.
Origination/underwriting fees

The mortgage origination fee is an upfront fee charged by the lender for processing. It’s a percentage of the loan amount — often about 1 percent.

An underwriting fee is charged by lenders to analyze a mortgage application, calculating the riskiness of the loan.

If this is broken out separately from origination fees, it’s something you should be able to negotiate for a reduction or elimination, McClary says.

“I’m already paying an origination fee,” he says. “Why are you having me pay for an underwriting fee?”

Tax service fees

A tax service fee covers the cost of hiring a company that will monitor your property taxes to verify the amount due each year and make sure the taxes are paid on time.

The tax service company is a subcontractor for the mortgage loan servicer. The servicer is the company that collects your monthly payments and distributes the money to local and state tax agencies, the homeowners insurance company and to the investors that own the loan. Your lender might be the servicer, or it might pass along that task to another company.

Courier/delivery fees

With some lenders, you’ll see line item fees for courier or delivery, or similar costs for transporting documents. You might even see “overnight” or “express delivery” charges.

These fees can be relatively minor, so it may be better to challenge larger fees than these types of itemized costs. It’s a more “efficient use of your time to try and make the biggest cut,” McClary says.

Appraisal fee

The appraisal fee covers the cost of the quick home examination to determine the value of the home for a mortgage. “(These fees) will vary widely across the country and even across the state,” says Andrew Pizor, staff attorney with the National Consumer Law Center.

The lender usually picks the appraiser or the appraisalmanagement company. “It should be passed along at cost,” he says.

McClary, of the National Foundation for Credit Counseling, says that if you have motivated sellers, you could negotiate with them to cover the cost.

Note that an appraisal is not the same thing as a home inspection, though they are often confused. In a typical inspection, a home inspector spends a half-day going over everything from the roof to the crawl space, in order to point out any potential problems with the home.
Title insurance

Title insurance covers the cost of doing a title search to make sure no one else has a claim to the property. It also pays for an insurance policy that will offer protection if claims surface later.

There are usually two policies. One covers the buyer, the other covers the lender.

You may be able to trim these costs.

“Always ask about the reissue rate,” Pizor says. The reissue rate is a homebuyer discount on the cost of an owner’s title insurance policy.

If your house has been sold relatively recently, most of the heavy lifting on a title search already has been done and there is less risk and less to check. The reissue rate takes that into account.

If you can take advantage of a reissue rate, it can mean “a decent savings,” Pizor says.

Attorney/settlement fees

Some states charge an escrow fee. “Escrow is the neutral party between the buyer and the seller sometimes used in lieu of an attorney,” says Beth Peerce, a vice president with the National Association of Realtors and a real estate broker in Los Angeles.

Escrow is licensed by the state, and it can be a less expensive option than attorney fees, she says. Instead, a fee is paid to the title or escrow company, for conducting the closing.

Depending on where you’re buying a home, the closing will be handled by an escrow agent or an attorney, and the charge is often listed as the “settlement fee.”

Settlement fees typically run from $400 to more than $1,000, depending on location, says Mike Dimech, senior vice president of operations for Norcom Mortgage.

Don’t confuse escrow fees with money held in escrow. The latter is money held for payments made periodically for flood insurance, property taxes and property insurance.

Municipal charges

Recording fees, title fees and transfer taxes are costs that local municipalities charge when a property changes hands. The exact terms will vary, but these costs are incurred to record that the property now belongs to someone new.

If you’re unsure of these costs, call your county or municipality to make sure the charges right. “There shouldn’t be any padding here,” Pizor, of the National Consumer Law Center, says.

Prorated property tax

Prorated property taxes often catches buyers by surprise.

Property taxes are often collected by lenders in advance, she says. And while the current owner has paid property taxes up to the closing, this cost covers the buyer’s portion from the closing date to the end of the tax year.

Other bogus fees

Be alert for phony fees listed under vague names for services. In this category are prep fees, quality control fees, file storage fees and email fees.

“I saw an email fee once for $50,” Pizor says. “That took some gall.”

The key to spotting bogus charges is to question them. “If you don’t know the vocabulary or it’s new to them, don’t be afraid to ask questions,” says Ron Phipps, former president of the National Association of Realtors. “Get over that.”

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Posted by Jackie A. Graves, President on February 14th, 2018 8:03 AM

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