By Mike Heayn Real Estate 101
IT’S TIME. YOU HAVE FOUND THE HOME of your dreams, had an offer accepted by the seller, completed all inspections, applied and qualified for a loan and are now nearing the close of escrow. However, one question remains — what are the closing costs?
Before 1974, finding out what your closing costs were was a difficult chore. I have heard horror stories of homeowners who had last minute — and I mean the day they were scheduled to close — costs added to their loan. Mortgage brokers were notorious for adding these last minute charges. Viewed as snake oil salesmen 35 years ago, mortgage brokers were known to over promise and under deliver. Nevertheless, change came in 1974, when the government passed the Real Estate Settlement Procedures Act of 1974 or RESPA. One important thing RESPA did was identify real estate closing costs. Borrowers were now required to be given a good faith estimated settlement or GFE, which disclosed all of the estimated closing costs. Now borrowers could clearly see what they were being charged before the close of escrow. RESPA also cleaned up the mortgage broker industry, providing transparency, which helped make mortgage brokers more legitimate.
The items on a GFE break down: ■ Loan origination fee — This is the cost of the loan that is paid to the lender. ■ Appraisal fee — Most lenders are going to charge you for the appraisal. ■ Tax service fee — This is a county fee often called a junk fee. ■ Flood certification fee — Another county fee or junk fee. ■ Processing fee — Most lenders/brokers will charge some type of processing fee. ■ Wire fee — Wires are not free and you and/or the lender has to pay for the service. ■ Interest @ “x” per day — Covers the interest accrued on the new loan. ■Hazard insurance — No lender is going to allow you to take ownership of a property without the proper insurance in place. ■County property tax —You will be responsible for paying your new property taxes. ■ Title insurance — This charge is usually split between the buyer and seller. ■ Escrow — Like title insurance,this charge is usually split between the buyer and seller. ■ Recording/filing fees —This is the cost of recording in the county hall of records.
Depending on the type of real estate transaction, the lender may require you to impound property taxes and hazard insurance.
Impounds or escrow impounds are when the lender includes your tax and insurance payments divided by 12, for the number of months in the year, and adds that cost to your mortgage payment. The funds are kept in what is known as an escrow account and the monies do not accrue interest. Although this is convenient, it is not beneficial since you do not have a chance to earn interest on money for several months of the year. With that said, most lenders will not give the homeowner an option and will require tax and insurance impounds. It is important not only to have a down payment for a property, but also the closing costs. Per RESPA, you will receive a GFE, which will help you understand all of your closing costs.
MIKE HEAYN is a Washington Mutual multi-family loan consultant. He (310) 428-1342, or e-mailed at
Originally published in the Santa Monica Daily Press print edition on November 28, 2007. Read the original PDF.