Closing Costs Explained

Loan Discount:

Often called "points", a loan discount is a one-time charge used to adjust the yield on the loan to what market conditions demand. It is used to offset the constraints placed on the yield by State or Federal regulations. Each "point" is equal to one percent of the mortgage amount. For example, if a lender charges four points on a $60,000 loan, this amounts to a charge of $2,400.

Appraisal Fee:

This charge, which may vary significantly from transaction to transaction, pays for a statement of property value for the lender made by an independent appraiser. The lender needs to know if the value of the property is sufficient to secure the loan if you fail to repay the loan according to the provision of your mortgage contract, and the lender must foreclose and take title to your house. The appraiser inspects the house and the neighborhood, and considers sales prices of comparable houses and other factors in determining the value. The appraisal report contains photos and other valuable information. It will provide the factual data upon which the appraiser based the appraised value. Your Lender is required to provide you a copy of the appraisal upon request. Therefore, it is important that you reach an understanding with your lender if you wish to see the appraisal report, preferably, at the time of payment of the appraisal fee. The appraisal fee may be paid by either the buyer or the seller, as agreed in the sales contract.

Credit Report Fee:

This fee covers the cost of the credit report which shows how you have handled other credit transactions. The lender uses this report in conjunction with information you submitted with the application regarding your income, outstanding bills, and employment to determine whether you are an acceptable credit risk and to help determine how much money to lend you.

Lender Inspection Fees:

This charge covers inspections, often of newly constructed housing, made by personnel of the lending institution or an outside inspector.

Assumption Fee:

This fee is charged for processing paperwork when the buyer takes over the payments on the seller's existing loan.

Items required by lender to be paid in advance:

You may be required to prepay certain items such as: accrued interest, mortgage insurance premium, and hazard insurance premium at the time of settlement.

Pre-paid Interest:

Lenders usually require that borrowers pay, at settlement, the interest that accrues on the mortgage from the date of settlement to the beginning of the period covered by the first monthly payment. For example, suppose your settlement takes place on April 16, and your first regular monthly payment will be due on June 1. On the settlement date the lender will collect interest for the period from April 16 to May 1. Your June 1st payment will be applied to the interest that accrued from May 1st to June 1st.

Mortgage Insurance Premium:

Mortgage Insurance protects the lender from loss due to payment default by the borrower. The lender may require you to pay your first premium or a lump sum premium covering the life of the loan in advance, on the day of settlement. The premium may cover a specific number of months, a year in advance or the total amount. With this insurance protection, the lender is willing to make a larger loan, thus reducing your down payment requirements. This type of insurance should not be confused with mortgage life, term, or disability, insurance designed to pay off a mortgage in the event of physical disability or death of the borrower.

Hazard Insurance Premium:

This premium prepayment is for insurance protection for you and the lender against loss due to fire and natural hazards. This coverage may be included in a Homeowners Policy which insures against additional risks which may include personal liability and theft. Lenders often require payment of the first year's premium at settlement. A hazard insurance or homeowner's policy may not protect you against loss caused by flooding. If your mortgage is Federally insured and your property is within a special flood hazard area identified by FEMA, you may be required by Federal law to carry flood insurance on your home. Such insurance may be purchased in participating communities under the National Flood Insurance Act.

Reserves Deposited with Lenders:

Reserves (sometimes called "escrow" or "impound" accounts) are funds held in an account by the lender to assure future payment for re-occurring items such as real estate taxes and hazard insurance. You will probably have to pay an initial amount for each of these items to start the reserve account at the time of settlement. A portion of your regular monthly payments will be added to the reserve account. RESPA places limitations on the amount of reserve funds which may be required by the lender.

Hazard Insurance:

The lender determines the amount of money that must be placed in the reserve in order to pay the insurance premium when due.

Mortgage Insurance:

The lender may require that part of the total annual premium be placed in the reserve account at settlement.

City/County Property Tax:

The lender may require that part of the annual tax amount be placed in the reserve account at settlement.
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