What are Closing Costs?
It is common to hear the term “closing costs,” but what exactly are they? Closing costs are actually one of TWO parts that make up your settlement charges. Settlement charges consist of both your closing costs and prepaid items and are collected at closing.
Closing costs are comprised of lender and third party fees. Some of these fees include, attorney’s fees, appraisal fee, title insurance and title search, pest inspection, and county recording fees, among others. Many mortgage companies also charge a loan origination fee, which is a charge for processing your loan’s paperwork. At Arbor Financial, it is our policy to not charge this fee, affording you the potential to save thousands of dollars in closing costs.
Prepaid Items are real estate taxes and home owner’s insurances that are prepaid by the buyer and put into an escrow account by the lender so that there are adequate reserves when these bills come due. These are known as “pre-paid items” because they are payments made in advance of the monies being due. Prepaid items are not considered closing costs because they would have been paid whether you received a new home loan or not and are unrelated to the process of receiving a mortgage.
While closing costs will vary from lender to lender, pre-paid items will be the same, no matter which lender you chose. If you should find yourself confused whether a certain charge is a closing cost or a prepaid item, just ask yourself: “Is this a charge that I would have to pay if I was purchasing this home without a mortgage?” If so, then it is a prepaid item. If not, then it is a closing cost.
In regards to a refinance, settlement charges can be rolled into the loan amount if the equity of the home is great enough to cover these charges.