Closing costs can be generally divided into three categories: 1) Lender's charges, 2) Fees charged by others (generally known as "third party charges", and 3) Pre-paid items.

Below is a list of closing costs and pre-paid items, reflecting Baker and Lindsey's lender charges:

1) Closing costs - lender charges:

•  Origination fee - when applicable, up to 1% of the loan.
•  Points - paid to reduce the rate, varies with the market; each "point" is 1% of the loan (e.g. $800.00 for $80,000 loan).
•  Lender charges - Baker and Lindsey, Inc. combined all of its lender charges into one fee of $350; this fee includes Tax Service, Underwriting, Processing, Flood Certification, Document Preparation, and recordation of assignment. Elsewhere, these fees are charged separately, and are typically from $300 to $500, although considerably more in some cases - I have seen as much as $3,300.

2) Closing costs - fees charged by others ("Third party" charges)

•  Appraisal fee - $275 for VA, averages about $300 for conventional loans, and about $350 for FHA loans. These figures are for single family homes only; the cost is higher for 2-4 family units. VA  sets the fee and selects the appraisers. For conventional and FHA  loans, the appraiser is almost always chosen by the lender, and the cost will vary somewhat depending upon the particular appraiser, and, on occasion, the property. For example, properties requiring more research than usual, such as a waterfront or rural property, may be $350 to $400, rarely more.

Note: Under VA regulations, the veteran is not permitted to pay for the appraisal if it was obtained prior to the date of contract; in other words, if the appraisal is obtained for the veteran, then he/she can pay for it.

•  Credit report - from $25 to $60, typically $50 to $60.
•  Inspection fees - If for repairs required by the appraiser, then the fee cannot be paid by the veteran for VA loans, and only one inspection visit can be charged to the borrower for FHA loans. For inspections requested at the option of the borrower, the cost is paid by him/her. A typical inspection for an appraisal repair is $50 to $75.
• Title insurance - varies with company, averages about .9% of loan amount (e.g. $720 for $80,000 loan), but is a smaller percentage as loan size increases; so a $150,000 loan might be .75% - about $1100. This estimate  includes the cost of preparing all documents, title research, etc., as well as conducting the closing itself; if an attorney closes the loan, sometimes there is an additional charge for the attorney.
•  Record mortgage and deed - about $30 to $35.
• Documentary stamps on note - 35 cents per $100 of loan, rounded to the higher $100. (e.g. a $101,250 would be based upon $101,300, resulting in $354.55); .35 cents per $100 is the same thing as .35% - $350 for $100,000 loan.
•  Intangible tax on mortgage - .2% (2/10 of 1%) - $200 for a $100,000 loan.
•  Documentary stamps on deed - 70 cents per $100 of purchase price, rounded to the higher $100 (hence a $98,771 sales price would be taxed on $98,800). The stamps in this example would be $691.60 - the same thing as .7% (7/10 of 1%).

Note: This charge is almost always paid by the seller, although this is not a requirement except in the case of VA loans.

• Survey - almost always a requirement, averages about $275. Properties which require more time to survey, such as in rural areas, will cost more, sometimes $500 to $1,500. In the case of refinancing, the survey obtained at original purchase can be used, provided there have been no changes to the property which would alter that survey - such as room additions, porches, pools, etc.
•  Termite/pest inspection - typically $50 to $75. Cannot be paid by the veteran for VA loans.

3) Pre-paid items

•  Pre-paid interest - Is a result of how the date of the first payment is structured; that is, for virtually all lenders, the first payment is set to begin no less than one month from closing. This policy means that if a loan closes on any date except the first, then the loan begins the first of the next following  month. For example, a loan closing August 2nd would have a first payment of October 1st (because beginning September 1st would make the payment due one day less than a full month). Since any mortgage installment pays interest for the preceding month - in this case October pays for September - and since interest is due from the date of closing, then then lender collects pre-paid interest from August 2nd thru August 31st. The result is that a borrower pays from one to 30 days (the maximum) pre-paid interest at closing . Note in this example that the September payment is "skipped"; it isn't really, as it was made at closing. Accordingly, it is a myth to state that closing at the end of a month saves money; anyone who declares would benefit from learning more about  the calculation of interest.

The maximum is 30 days interest - $750 for a $100,000 loan at 9% ( you can calculate it yourself by multiplying the loan by the rate, and then divide by 365 (Note: some lenders use a 360 day year). So, in this example: 100,000 x .09 = 9,000 divided by 365 = 24.66 (rounded).

 First year's homeowner's insurance premium - the first year's premium is paid in advance at closing. The title company or attorney will collect the money at that time, and then send the premium to the insurance company. Normally, this money is not paid directly to the insurance agent by the borrower. Using the Tax and Insurance Table provided, you can make a reasonable estimate of the amount. For example, an $85,000 purchase price would be $420 ($35 x 12).

 Tax and homeowner's insurance escrow - for virtually all types of loans, the monthly payments are made by due date, and there must be in the escrow account the full amount at least 30 days before the due date, then 1 to 2 months' insurance and 3 to 4 months' taxes are paid into the escrow account at closing. Using the Tax and Insurance Table, for, say a $105,000 purchase price, the escrow would be something like this: 2 months' insurance = $88 ($44 x 2), and 4 months' taxes = $428 ($107 x 4), for a total of $516.

         Beginning in 1995, a new federal law went into effect, resulting in what  is generally referred to as the "Aggregate Escrow Adjustment". Fundamentally, the law limits the amount of money a lender can require to be placed into an escrow account for taxes, insurance, etc. The law includes a specific method of how to calculate the amounts to be collected, treating all the items taken together, rather than treating them separately.

The practical consequences are: After your escrow is first set up using the method above, it is further reduced by an amount which is determined by projecting escrow the account activity (money received with each payment, and paid our for taxes, etc.) for the first 12 months after closing. This projection (spread-sheet in computer jargon) determines the maximum total amount - for taxes, insurance, whatever - which is permitted by law to be paid into the escrow account at closing, If this spread-sheet amount is less than the total using the traditional method (e.g. 2-3 months insurance, 3-4 months taxes), then the difference is credited at closing, and will show on the settlement statement as "aggregate escrow adjustment". So, using the example in the above paragraph, if the aggregate calculations said that the maximum permitted were $350, then the closing statement would show an aggregate adjustment of $59 ($409-$350).

•  Mortgage insurance escrow - similar in principle to homeowner's insurance, except that there is an option in the method of payment. The premium can be paid annually, in which case the first year's premium and escrow are set up in the same manner as for homeowner's insurance. Or, the mortgage insurance may also be paid monthly, in which case it is only necessary to escrow a month or two at closing.

The consequence of this difference is best explained by an example: Assume a loan amount of $95,000 for a $100,000 property (hence a 95% loan). If paid annually, the first year would be $1,045, and two months' escrow $80 (at renewal rate of $480/year, or $40/month; when premiums are paid annually, the first year is often different from the renewal rate). If paid monthly, then (generally) two months' are paid in advance at closing - mainly for logistical reasons- which in this example would be $106 total (at a rate of $53 per month). By paying the premiums monthly, the borrower would pay $1019 less at closing.

Note: While there is a considerable difference in cash at closing - $1,019 - the monthly amount is $13 lower when the premium is paid annually, which adds up to $156 per year, $780 in five years, and $4,680 over thirty years. In any event, nowadays virtually all borrowers chose to pay monthly.

• VA Funding Fee, FHA Up Front Mortgage Insurance Premium - VA charges a one-time fee, which varies with downpayment, type of service (Reserve versus Active duty), and prior usage (See previous section on VA loans.), and FHA a fee of 2,25% for 30 year loans, and 2% for 15 year loans. In both types of loans, this Fee or Up Front Premium can be paid by funds borrowed from the lender; in other words, the cost can be added to the maximum loan. For VA, the maximum loan is 100%; hence a $100,000 purchase price, with a Fee of $2,000, would permit a total maximum loan of $102,000. For FHA, the downpayment computations are quite complex; it is not just a simple percentage of purchase price. So, let's just say that the maximum loan was $70,000, based upon a given sales price; the Up Front Mortgage Insurance Premium would be, for a 30 year loan, $1,575. The maximum loan could be increased to $71,575. For first-time homebuyers who have successfully completed a HUD approved class in buying a home, the Up Front premium is reduced to 1.75%.

In summary, the Funding Fee and Up Front Premium increase the cost of borrowing the money, but do not increase the cash due at closing.

Note: FHA also charges ( almost always ) a monthly premium in addition to the one paid up front. It is 1/2% per year based upon the average balance excluding the Up Front Premium added to the initial loan. For a $71,575 loan, the monthly premiums during the first year would be $29.06 for a 30 year loan at 9% (The monthly premiums will vary slightly with the interest rate because a loan amortizes at a different "pace" with different rates - about 1 cent per month per 1/2% of rate. I had to program our computer to figure it out; FHA is not big on doing things the easy way.).

Note: The premium amounts for FHA, Up Front and monthly, as well as the VA Funding Fee, are subject to change by Congress.

For a quick approximation of closing costs and pre-paids, not counting any points (but including the origination fee), use the following factors, using the same assumptions described in the next paragraph regarding the Good Faith / Truth-in-Lending Statements:

VA - 2.5% of the loan plus $600 plus Funding Fee
FHA - 2.5% of the loan plus $650 plus Up Front Premium
Conventional - 2.5% of the loan plus $850 plus any mortgage insurance
Add to the above factors about 1% to 2% of the price for pre-paids, plus any monthly mortgage insurance ( FHA and conventional only ).