What’s the Difference (Part 2)

(Part 2 of 3 posts on terminology that can often create confusion)

What’s the difference between a “closing cost” and a “prepaid expense”?

Not including the down payment, a home loan has two primary areas of expense –  closing costs and pre-paids.  Closing costs are fees associated with handling and setting up your loan that are charged by a lender and/or title company.  A common misconception about these expenses is that they all go to the lender.  In reality, many of these costs are charged by third-party vendors for required services to complete the purchase or refinance transaction. 

Some common Closing costs may include items like:

*Appraisal fee (determines fair market value of your home)

*Attorney fee (to review/prepare closing documents)

*City/County/State tax stamps (related to the sale of property)

*Closing/Escrow fee (for handling the documents and fees for closing the loan)

*Courier fee (for transportation of documents, often between title agency and lender)

*Credit Report fee (to gain and review report to determine credit worthiness)

*Flood Certification (determines if home is located in a flood zone)

*Home Inspection (evaluates systems and structure of the home for health and safety)

*Notary/Witness fee (to certify signing of closing documents)

*Recording fee (to record sale and liens as public record)

*Transfer tax (government tax for transfer of property)

*Survey fee (certifies location of buildings and structures relative to property lines)

*Tax service (to make and/or monitor payment of taxes)

*Title Insurance policy (insures ownership interest in the property)

*Title Search (review of history of title exchanges for the property)

*Escrow Waiver fee (single fee to not have an escrow account for taxes and insurances)

Pre-paids expenses are costs based solely on the value of your home and therefore vary from one property to another.  These expenses are also used to establish escrow accounts for expenses that a servicing lender would pay on your behalf.  Your lender may collect up to an extra 15% of the annual amounts owed as a cushion for future increases in these expenses.  These accounts are ‘funded’ at closing.

Typical pre-paid expenses may include:

*Homeowner/Hazard Insurance (protection against damage to the home and/or personal property)

*Mortgage Insurance (protection for lender in case of default on the loan)

*Pre-paid Interest (interest on the loan from the date of closing to the end of that month)

*Property taxes (taxes on real estate due to the local government)

Coming soon, Part 3 – What’s the difference between an inspection and an appraisal?

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2 Responses to “What’s the Difference (Part 2)”

  1. Mortgage Loan Says:

    There are also closing costs to pay for items such as title policies, recording fees, inspections, courier charges, reserves to set up an impound account and fees that a lender charges. Tnx for sharing this useful post.

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