Why Does Your Mortgage Loan Disclosures Show Higher Closing Costs?

In most cases the closing costs are not actually higher, although they appear that way due to accounting for reoccurring costs such as mortgage interest, property taxes and fire insurance. Before we dive into the nuts and bolts let’s go over closing costs….

Re-occurring Vs. Non-reoccuring Closing Costs

Recurring Closing Costs: are the carrying costs of owning a home such as interest, property taxes and fire insurance. They are reoccurring in the sense that they are continual and open ended and they are not one time fees

Nonrecurring Closing Costs: these are the one-time fees associated every time you do some type of a mortgage or real estate transaction. Included in these fees are things such as title insurance, recording fees, a lender fee, escrow fee, Doc prep fee, payoff fees, things like that, one time fees specifically tied to some type of a transaction.

…..As For Why The Closing Costs Appear Higher

Closing costs on purchase transactions typically range about 2.5 to 3% of the purchase price of the property, not the loan amount. On refinance loan transactions, closing costs are approximately 1% of the loan amount on average. It does not necessarily matter whether purchasing the home or refinancing a mortgage, lenders are under tight scrutiny to disclose all material fees associated with the transaction.

If you have an escrow account or plan to have an impound account, same thing, by the way, the lender you’re making your house payment to every month will collect for monthly property taxes and fire insurance in addition to your principal and interest payment. Upon inception of the loan, the new mortgage lender will set up an ahccount for collecting these monies at settlement/at close of escrow. Because the lender has to have a surplus of funds in the newly established escrow account they have to collect for future months worth of property taxes and fire insurance which increases the loan amount on a refinance transaction or the cash to close in a purchase transaction, thus making the closing costs seem higher on the disclosures lender provides.

In other words, the closing fees aren’t necessarily higher it’s a function of setting up for the escrow account which inflates the figures, but at the end of the day it becomes a wash because these additional items such as the property taxes, fire insurance etc. are carrying costs are required to own property.

*Mortgage Tip: if you are financing real estate anytime up October through December February through April, the lender has to account for first and second installment of property taxes which are due even if you have an escrow account on the loan you’re paying off ( when refinancing) because the new lender does not have a way to reach into the escrow account with a lender being paid off to pay the first installment or second installment of property taxes when they are due. In such scenarios, a reimbursement is offered after the fact from the tax collector in about 2 to 3 weeks.

Looking to get an estimate of what your closing costs will be for a mortgage? Let us send you a complimentary spreadsheet of the numbers, no obligation start with our online mortgage rate quote today.

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