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What are closing costs?  Why do you pay them?

Many people are involved in the process of buying or refinancing a house.   They include the Realtor , lender, appraiser, insurance company, inspectors, title company, your local government and your attorney.  Each of these parties charges fees for their services in processing and funding your loan.

Some of the fees described below may not apply to your type of mortgage loan

bullet Appraisal Fee - This fee is charged at loan application and is payment to an appraiser for researching the fair market value of the property.   The appraiser compares the the property to other similar homes in the neighborhood which have recently been sold.
bullet City or County Transfer Tax - Taxes charged when a property transfers ownership.  Similar to a sales tax, not to be confused with your local recurring property tax.
bullet County Property Taxes - Taxes billed for the ownership of property, usually paid twice a year.  These taxes are generally prorated and sometimes result in a credit from the seller when purchasing a property.  If you will have an escrow or impound account, several months worth of taxes may be collected from you at closing to deposit in your account. 
bullet Courier Fee - Paid to a courier for delivery of documents from the lender or to express payoff of an existing loan on the property.
bullet Credit Report - This fee is charged at loan application to provide the lender with a report detailing a borrower's credit history.
bullet Flood Certification Fee - Paid for a flood certification which states whether or not the property is located in a flood zone.  If so, the lender will require you to purchase flood insurance.
bullet Hazard Insurance - (Homeowner's Insurance)  If you are purchasing the property, the lender will require you to pay the entire first year's premium.  If you will have an escrow account, at least two additional months will be collected at closing to deposit in the account. 
bullet Interest to End of the Month - Lenders charge interest from the date the loan is funded until the first day of the following month.
bullet Inspection Fee - This fee is charged for inspection of a property after an appraisal.  It is usually done if you are buying new construction and the lender wants to be assured the house is completed.
bullet Mortgage Insurance Premium - Private Mortgage Insurance (PMI) may be required on certain loans, generally if you are putting less than 20% down.
bullet Origination Fee - A fee charged by the lender for making a mortgage on the property.  This fee usually is computed as a percentage of the loan amount.
bullet Pest Inspection - Fee charged for a termite inspection of the property.  This may sometimes be waived, but some lenders may require it.
bullet Points - Also known as discount points.  A one time fee charged by the lender to lower the interest rate normally charged.  Each point is equal to 1% of the mortgage amount.
bullet Processing Fee - Fee charged to pay for the processing of the paperwork for your loan.
bullet Recording Fees - Fees paid to your county which records documentation of your legal ownership of the property, such as the deed, mortgage, note, etc.
bullet Settlement or Closing Fee - A fee paid to the title company or attorney for handing all the financial transfers and payments associated with the transaction.
bullet Tax Service Fee - A fee charged for researching county tax records to confirm that the taxes are paid in full and up to date.
bullet Title Insurance - Guarantees that your property has no other lien or claims against the property.  Your lender requires that you purchase title insurance.
bullet Underwriting Fee - The lender's fee for reviewing your loan application for approval.
bullet Wire Transfer Fee - When you purchase or refinance, funds will be wired to fund the transaction. The receiving account charges a nominal fee for the wire transfer.

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