Closing costs for a mortgage can typically be divided up into three categories:
Lender origination fees or any points you might be paying for the interest rate.
Pre-paid items, such as a pre-paid impound account or pre-paid interest.
Now the first category, lender fees, refers to the cost of doing the loan with the bank you’re working with. Typically when you’re getting a home loan whether it be for a refinance or purchase, the bank you’re working with will charge you a fee for doing the loan for you. Sometimes, depending upon how you’re home loan is structured, you might also have to pay what are called “points.” If you are paying points at closing then this most likely means that you are paying to buy down the interest rate to what you’ve been quoted.
The next set of fees you’ll have to be ready for are title/escrow fees. Whenever you’re getting a home loan, the lender will want sure that there is lender’s and owner’s title insurance on the property. In a purchase transaction, the buyer will usually pay for the lender’s title insurance and the seller will pay for the owner’s title insurance. Title insurance protects both the buyer and lender by insuring a clear chain of title. And this is to make sure that the ones who are conveying the property actually have a legal claim to it.
The escrow fee is a service fee that is charged by your title company for acting as an independent third party in facilitating the transaction.
The final closing cost category we’ll look at is pre-paid items. The first pre-paid item you might have to pay for at closing is going to be for your impound account. Depending upon your loan scenario or preference, you might have an impound account and if that’s the case, then you’ll have to set aside a certain amount of funds for an initial deposit into that account, depending on the time of year your loan funds.
The other pre-paid item you might have to pay for is pre-paid interest and the amount of pre-paid interest you’ll have to pay at closing will be determined by what day of the month your loan funds.
So again to summarize there are three main closing cost categories to keep in mind, lender origination fees, title/escrow fees, and pre-paid items.