Every borrower wants to know what their closings costs will be.  Each poses this question in a different manner:

“How much cash do I need at closing?”

“What kind of points do I have to pay?”

“How much is the closing credit and what does it cover?”

“What is included in prepaids?”

“How much are all the costs beyond my down payment assistance?”

Some of the mystery concerning closing costs come from how each of the different industries (real estate, title, lending) involved refer to the charges that appear on the HUD-1 Settlement Statement and how they are labeled on that form.

Everything on page two of the HUD-1 is totaled and labeled “Total Settlement Charges” as part of the preprinted form.  It is that same figure that is brought forward onto page one into the preprinted section “Settlement charges to borrower (line 1400)”.  A lot of the confusion stems from the perspective of whether you are refinancing or purchasing a property.  Let's break it down into each group and review each of the charges that can take place.

Refinance

Refinances are where most of the confusion comes as some of the items that are included in “Total Settlement Charges” are not transaction costs because as an existing homeowner you already pay these items and would continue to do so whether you completed the refinance or not.  These include interest on the outstanding principal, real estate taxes and homeowner's or hazard insurance.  These are included in two sections in the HUD-1 entitled “Items Required by Lender to be Paid in Advance” and “Reserves Deposited with Lender for”.

The first is for interest on the new loan until the end of the month in which settlement takes place and the second is for your escrow accounts should you have them.  In addition, each of these sections makes provisions to collect mortgage insurance if it is required.  If you had mortgage insurance on your existing loan and it is required again based on the combination of value and loan amount then it is a continuation of an existing condition with adjustments for the current loan-to-value and is not actually a new cost.

Other charges include the following:

Appraisal, line 803: Must be done to ascertain the value of the property especially if a refinance.  If this is a purchase then we use the lower of the sale price or the appraised value to determine the loan-to-value (LTV).

Credit Report, line 804:  Typically consists of a tri-merge in-file which is then run through an automated underwriting system (AUS).  Must verify accuracy of the data included in the report.

Lender fees:  These include a funding or underwriting fee, a tax service fee and flood certification.  The funding fee is for the underwriting that the lender performs.  The other two charges are typically to third parties to insure that the real estate taxes are paid and kept current for the life of the loan and to determine whether the subject property lies in an area designated as a flood plain.

Title Charges, Line 1100:  Includes the cost for conducting the settlement, performing the title abstract and examining it and preparation of the title insurance binder.  The most costly item in this section is usually the title insurance premium which is regulated by the state's insurance commission.  At a minimum, you must pay for a policy to insure the lender against loss due to a title issue claim.  If it is a refi you may be entitled to a reissue rate discount.  Be sure to ask.

Miscellaneous Title charges:  These items may include courier or overnight fees and the preparation and recording of any necessary releases from existing lien holders.

Government Recording and Transfer Charges, Line 1200: Here are where some of the heftiest charges occur. For a refi in Fairfax County, Virginia, the charge is typically $46 to record a deed of trust.  But the charge for the county for the tax stamps is 0.0833% of the loan amount or “$.0833 per $100 rounded to the next highest $100”.  The state charges a substantially higher rate of “$.25 per $100 rounded to the next highest $100”.  A $300,000 loan would have $249.90 going to the county and $750 going to Richmond.

That should be it unless you are buying down the rate with prepaid interest or “points”.  A point is equal to one percent of the loan amount.  They would appear toward the top in lines 801 and/or 802.

Purchases

The biggest contrast between refinances and purchases is the issue of "cash-to-close" and how the different charges are viewed between the two transactions.  As stated previously, a borrower who is refinancing is paying many of the "settlement charges" already and will continue to do so whether they refi or not.  For the purchaser, all the charges feel like and are typically considered closing costs especially for the first time buyer.

Whereas the move-up buyer is currently paying interest on an outstanding principal balance (unless it is owned free and clear), real estate taxes and a hazard insurance premium it is for a completely different property and transaction.  While the move-up buyer may feel that they are essentially paying twice for the same costs they are in reality trading one set for another.  However, first time home buyers are presumably trading a single rent payment for costs they have never before encountered and it can be daunting.

What are the specific additional costs and charges that a buyer sees beyond those described above for the refinance?  There are several meaningful differences:

Items Required by Lender to be Paid in Advance, Line 900:  As a purchaser of a new home you will want to insure the property against calamity.  In this section, the charge for the first year's hazard or homeowner's insurance premium will be noted as paid outside closing (POC) or be collected as part of the net funds due.

Title Charges, Line 1100:  Your charges for title work may be less for one or both of the following reasons:  There is now a seller that some of the time charge can be allocated to and very often settlement or title companies will provide discounts to realtor's buyers for bringing them the settlement work.

Government Recording and Transfer Charges, Line 1200:  This is the one charge that is substantially different and bigger.  The state and county not only charge based on the mortgage amount as in a refinance but also have the same type of charge based on the sale price.

Additional Settlement Charges, Line 1300:  As a purchaser you will typically incur a charge for a survey of the subject property and for a pest inspection.  This of course will depend on the sale's contract negotiations and who was stipulated to pay for these services.

Some of the other charges a purchaser may encounter include the Home Warranty premium, proration of the condo or home owner's association fees, a recordation fee for something such as a power of attorney, utility setup and/or turn-on fees and the realtor administration fee.

Many of these fees are non-negotiable.  As an example, the county will not record your deed of title and deed of trust without collecting its pound of flesh.  No recordation means no loan as lenders will require their lien to be “perfected”.  But that doesn't mean you have to end up paying for it.  Be sure you understand the “no closing cost” options and seller assisted closing costs.  In the meantime, if you have a question or concern call or write us.
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