What are closing costs and does the borrower need funding for closing costs when buying or refinancing a home? Moreover, what costs differ from purchasing a home in comparison to refinancing a home?

When a borrower has finally qualified for a loan, the lender will draw up an application that the lender and the borrower will both go over. In this application is a Good Faith Estimate (GFE) which will give the borrower a good estimate of how much the total closing costs will amount to when either buying or refinancing a home. Closing costs (settlement statement) are the expenses besides the sales price of the subject property. Some of these costs are as follows:

Loan Origination

Title

Notary Fees

Attorney Fees

Taxes

Property Survey

Appraisal Fee

Underwriting Fees

Documentation Fees

Points

Processing Fees

Courier Fees

These fees will vary on location so note not all of these fees will be applied to every settlement statement

It is a good idea to have the (GFE) in hand and agreed upon right away, but in any case, the lender has three business days to mail it to the borrower from the day the original application was signed per the Real Estate Settlement Procedures Act (RESPA). The Good Faith Estimate is an educated guess based on past experiences by the lender. This educated guess is a culmination of the fees shown above, but these fees should not vary more than $500 either way come closing day. The borrower should always anticipate more than the original estimate, although, hopefully the lender has already done so.

Closing costs also differ between purchases and refinances. For example, if the borrower is purchasing a home the home buyer has the option to ask the seller to cover the closing costs. Borrowers who are in the process of refinancing do not have this option.

Sometimes the lender can pay for the closing costs, and depending on the situation the interest rate can be bought down in exchange for additional points to be paid in origination. Also, the borrower does have the choice of a few of these fees such as Title Company, Appraisal Company, and Escrow Company. So these fees can be reduced if the borrower uses their own referral. Although, the borrower must know that every situation is different, an appraisal company across town may not know an area as well as one who specializes in a particular location. This is important because the borrower may have to pay an appraisal fee twice if an appraisal does not price the subject property for what is needed.

The timeliness of the closing also affects closing costs. Hopefully, a closing is set for the end of the month, because interest for the remainder of the month must be paid, if there are only a few days left in the month the less in interest that the borrower must pay.

Remember all closing costs will differ depending on the situation, either way the closing costs must be paid, but there are many options when paying for them.