What are closing costs?
Everyone has heard the advertisements for home mortgages with no closing costs. Likewise the Federal Trade Commission has heard those ads and, like you, they know when something sounds too good to be true it usually is.
While Home Equity Lines of Credit (HELOCs) often come with no closing costs it is virtually impossible for originating lenders to offer first mortgages without any closing costs. Eliminating closing costs all together on a first mortgage is difficult even in the best of situations because of the number of moving parts there are in the closing process.
Minimally there are six or more parties who do work which ends up being due at closing. Those costs will be paid one of three ways, generally, which include the seller paying them, the buyer paying them or the lender paying them from the proceeds of the loan. Understanding how each of these affect you is important because what may be advantageous to one borrower may be detrimental to another.
Closing costs are somewhat misunderstood by most home loan borrowers because it is rare for the mortgage broker or loan officer to take the time to provide some basic information about the home loan process and more specifically the closing costs associated with a new home loan. While this article intends to introduce the reader to closing costs it is not within the scope of this article to identify and explain each cost individually. Costs that are paid at closing can be broken down into categories:
True closing costs
True closing costs of a home loan are costs that are incurred because there is a loan. There are other costs that would be included at closing which are not true closing costs. What we will refer to as true closing costs are fees associated with the loan such as mortgage origination fees, underwriting fees, processing fees and other lender fees. Lender’s title coverage is also a true closing cost as would be any inspections or other legal fees required by the lender.
Incidental closing costs
Regardless of whether or not one is using a mortgage company to secure a home loan or paying cash for a property there are fees which would be prudent if not required. These include attorney’s fees and title certification fees, appraisal fees and even inspection fees if the home buyer so desires. While these are included on the settlement statement they would also be due if the lender was not being used – in other words if there was no home loan associated with the transaction these fees would still exist.
Pre-paid items
There are costs which are shown on the HUD1 settlement statement which are paid to third parties such as property taxes, home owner’s association fees and dues and advance insurance payments. While these items may indeed be part of the funds brought to the attorney at the closing table they are fees neither charged by nor benefiting the lender, the seller or any other agent involved with the actual property sale.
Agency fees
While this one is rarely line itemized as a closing cost it generally consists of the largest portion of fees being disbursed at closing. Virtually every agency fee is paid from the seller’s proceeds at the closing table but there are rare instances when the agency fees are paid in cash by the buyer at the closing table.
Negotiable
Almost every closing cost is negotiable by the buyer. Mortgage companies and loan officers are also able to help with closing costs by adjusting loan amounts and interest rates which is where the advertising originates saying there are no closing cost loans. The truth is the closing costs are still due and they are being paid by the home loan borrower but in some way different than bringing cash to the closing. Whether or not it is a wise decision to have the loan structured so that the borrower is bringing less cash to the closing table is a cause for an individual consideration with a trusted, experienced, home loan expert.
