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Personal and Business Banking

Chapter 6: A Look at Closing Costs

Mortgage Guide

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Chapter 6: A Look at Closing Costs

Learn about the fees that are typically a part of mortgages wherever you get one.

Chapter 6: A Look at Closing Costs

Closing Costs are the expenses over and above your down payment that most buyers normally face when it comes time to close a loan. And these costs generally are not included in your loan amount. Closing costs are therefore usually out of pocket money. And although you can do your best to get the other side to pay the closing costs, you'd better understand what's included in that very loose term.

When you refinance an existing mortgage, you can often finance some or all of your closing costs by adding them to the loan amount. It usually depends on how much equity you've built up in the property. Doing this reduces your out of pocket expenses at closing. However, financing closing costs reduces the benefits of refinancing because you will be paying interest on your closing costs for the life of the loan.

StreetWise Tip: If you are considering a mortgage with no points and no closing costs, look carefully at the conditions. Some programs may be loaded with penalties. Be particularly wary of television and web ads from mortgage companies making no closing costs and no points promises.

We tell you here in advance exactly what we charge for these fees. Most lenders don't do that. In general, closing costs at DCU run $1,700 to $2,700 excluding any points. Any dollar amounts we refer to in this section are accurate at the time of publication and are subject to change without notice.

Lender's Fees

Lender's fees are one of the more common areas of abuse and it's often difficult to find out what you'll be charged until after you apply and get deep in the process. There are thousands of dollars at stake. Learn about these fees and get answers from lenders before you get stuck.

  • Loan origination fee – A fee charged by lenders to procure your mortgage loan. Virtually all lenders, including DCU, charge an origination fee. It's an important source of income for us and helps cover our operational costs. The industry standard for Loan Origination Fees is 1% of the loan amount, though many lenders charge more.

  • Discount points – Depending on the mortgage rate option you choose, you may have discount points. An example would be an 8% rate with 1 point versus a 7.5% rate with 2 points. The combination you select will depend on your available budget for closing costs and the number of years you expect to have your mortgage. We'll help you make the choice that's best for you.

    When most lenders advertise points with their rates, including DCU, the total points includes any origination fee points and discount points. Make sure your lender does before you apply! Some lenders will only advertise the discount points to make their deal look better than it is. You could get an expensive 1% or higher surprise in your closing costs.

  • Appraisal fee – An independent written opinion that identifies the property's market value. This document is generally required either by the lender's regulator or if the loans are to be sold by the lender into the secondary market, which most are. The fee can vary widely depending on the type and location of the property. For homes located in urban areas, this fee usually runs $250.00 to $550.00. DCU requires an appraisal on all mortgage loans and only charges you our actual cost for the appraisal. Lenders are required to provide borrowers a copy of their appraisal.

    A detailed appraisal will typically include photographs of the property and comparable properties in the area. Tax assessments and recent sales data for the property and comparable properties will be included. The appraiser will also look inside the home. If the mortgage will be relatively small, the lender may require a less detailed appraisal, often called a drive-by appraisal. Here the appraiser visits the property without a detailed physical inspection. These are less expensive for the lender.

  • Credit Report – A document summarizing the applicant's history of repaying debts. The cost of mortgage credit reports can vary depending on the source. A credit report is required for all mortgage loans. DCU only charges the borrower the actual cost of the report – $20.00 to $44.00. Many lenders add profit to this cost.

  • Mortgage broker fees – Fees paid to individuals who produce mortgage loans for lenders, usually an independent contractor. Mortgage brokers are paid a portion of the premium pricing earned (check the glossary for a definition of premium pricing). DCU will never charge you a mortgage broker's fee.

  • Tax-related service fee – A fee required by lenders to cover the cost of annually researching tax records to insure that the borrower is current on their property tax payments. DCU charges $60.00 to $99.00 to cover the cost we incur.

  • Application fee – One-time fee to take your mortgage loan application. This fee helps offset costs to process the application. It is typically not refundable if the borrower cancels the loan request after the lender has already invested time and money in processing the application. DCU charges $300.00, which is much less than many lenders.

  • Processing fee – One-time fee to process your mortgage loan application. Like the loan origination fee, this helps offset operating costs to bring a mortgage from application to closing. DCU charges $200.00, which is much less than many lenders. If someone offers you a lower fee, they may be making up the difference by adding so-called junk fees.

  • Underwriting fee – A fee charged to review and approve the mortgage application. DCU does not charge this fee.

  • Flood certificate – Fee charged to obtain the required government document used to determine whether the subject property is located in a flood plain. DCU only charges for our cost.

Items You Will Generally Pay in Advance

  • Private Mortgage Insurance (PMI) – If your loan is more than 80% of the value of the property (meaning your down payment is less than 20% of the appraised value), lenders require PMI. It insures the lender if the proceeds from a foreclosure are not adequate to satisfy the remaining mortgage balance. For certain loans, like FHA, this premium is paid in a lump sum at closing. For most conventional loans, this premium is paid monthly into your escrow account.

  • Hazard insurance premium – This is the annual premium for your homeowner's insurance.

Reserves Deposited with Lender

  • Hazard insurance premiums – In addition to the annual premium collected at closing, the lender collects an amount equal to two months of hazard insurance as a buffer for any possible increases in premium. These funds are collected monthly along with the mortgage payment and held in an account until the lender receives, and pays, the bill for the hazard insurance. DCU does not require this for mortgages we service (currently all loans we write).

  • Mortgage insurance premium reserves, School tax, Taxes and assessment reserves, Flood insurance reserves – the lender usually collects an amount equal to three months of estimated taxes as a buffer for any possible increases in tax rates or property values. These funds are collected monthly along with the mortgage payment and held in an account until the lender receives, and pays, the tax bill. DCU does not require this for mortgages we service (currently all loans we write).

Title Charges

  • Closing or escrow fee, document preparation fee – These are fees collected by the title company or attorney handling the closing. The funds are collected and paid as part of the transaction. DCU only charges what our closer charges us and we negotiate the lowest possible fee for our members.

  • Notary fees – DCU does not charge a fee for a notary in most states. Where we must pass those costs along, we only charge what our closer charges us and we negotiate the lowest possible fee for our members.

  • Attorney fees – Fees paid to an attorney to prepare the closing documents. In many states, an attorney is required to prepare documents in any real estate lending transaction. Again, DCU only charges you our cost and we negotiate the lowest possible fees – $450.00 to $680.00 is typical.

  • Title insurance – Provides insurance to owners of real estate to insure that they have clear title to the property they are buying, subject to any exceptions contained in the policy. Title insurance also insures the lender that they have an enforceable lien on the property, subject to any exceptions on the policy. No lender would originate a mortgage without title insurance. Title insurance rates are generally regulated by state Departments of Insurance.

    • StreetWise Tip: Title insurance provides you no protection against property line disputes. Confirm the exact location of your property lines before you buy. See Home survey pitfalls.

  • Tax deletion – Fee to pay the title companies to determine that all current and prior years' property taxes are paid. Again, DCU only charges what we are charged for this assessment.

Government Recording and Transfer Fees

  • Recording fees – Fee charged by the county to record the Deed of Trust or any other legal documents in the real estate loan transaction. DCU only charges our cost.

Additional Settlement Charges

  • Pest inspection – Required for a FHA loan by the government or possibly by the underwriter/investor as a condition of the loan. DCU only charges our cost of the inspection.

  • Survey – Covers a check of the boundary lines of the property and the location of permanent structures by a surveyor and a drawing outlining the exact dimensions of the property. May be required by the title company to establish clear title for a purchase or refinance anytime improvements (such as deck, fence, pool, etc.) have been done since the last survey.

    • StreetWise Tip:These surveys are generally not thorough enough to surface potential expensive property line disputes. Confirm the exact location of your property lines before you buy. See Home survey pitfalls

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