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Understanding Closing Costs
by Dick Lepre, Homeowners.com |
One of the areas that borrowers ask about most
often is closing costs. Some people understand what the items are that make up the closing
costs and just want a quotation. Some people think of closing costs as some disease-like
"death and taxes" thing and just want to know what the "damages are."
Some people have had bad experiences where they found that the actual closing costs were a
lot higher than they were led to believe.
One of the problems that people have with understanding closing costs is that the bleeping
forms mandated by the government are just a bit confusing. I would like to explain closing
costs in a manner that makes most sense to me.
I see closing cost as falling into four types:
- Nonrecurring Closing Costs
- Points
- Recurring Closing Costs
- Fees associated only with Purchase Transactions
Nonrecurring Closing Costs
Lenders Title Insurance
Whether you are purchasing or refinancing your existing loan, the lender will require a
policy of title insurance. This gives them a guarantee (by the title insurance company) as
to what liens are associated with the property the day the loan funds. If they miss
something, it's their problem.
Escrow (or Attorney's) Fee
An escrow company performs, essentially, two functions: getting the paperwork together for
you to sign and managing the escrow funds. They get all the money from everyone who has to
put money in and they dispense it to whomever needs to be paid.
Appraisal Fee
This goes to the appraiser. Often it is paid at the time of inspection. Otherwise it is
collected at escrow.
Appraisal Review Fee
If the appraiser is not on the list of approved appraisers for the lender or if the value
seems, shall we say, a bit creative, or if it is a large loan the lender will request that
another appraiser "review" the appraisal. This may be a desk review (just going
over the paperwork and the databases) or a field review (going out and taking a look at
the property).
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