Mortgage- and Lender-Related Settlement Costs
Charges for Establishing and Transferring Ownership
Amounts Paid to State and Local Governments
"All-in-One" Pricing of Settlement Costs
Estimates of Settlement Costs
Settlement Cost Tips
More Information
on Settlement Costs and Mortgages
Settlement Costs
Worksheet
Mortgage settlement--sometimes called mortgage closing--can be confusing. A settlement
may involve several people and many documents and fees. This information will help
you understand all that is involved. Although the focus of this guide is on settlements
for home purchases, much of it will also be useful if you are refinancing a mortgage.
Settlement costs can be high, so it pays to shop around and negotiate with the seller,
your lender, and your attorney or settlement agent. The less you have to pay in
settlement costs, the more funds you will have for other things.
Different regions have different customs and practices regarding who pays for what
at settlement. Buyers and sellers are free to negotiate certain fees. In slow-moving
real estate markets, the seller may agree to pay points or fees for the buyer. In
fast-moving markets, the buyer may have to agree to pay more costs to close the
deal. Whatever you negotiate will become the sales contract. However, be careful;
if some buyer's costs are shifted to the seller, it may increase the price you pay
for the property.
You can reduce some settlement costs by shopping around for the services. The point
is this: the more you know about the process, the better your chances are for saving
money at settlement time.
Because practices vary significantly from area to area, it is difficult to provide
estimates for settlement costs that fit everywhere. However, one rule of thumb for
buyers is to figure that settlement costs will be about 3% of the price of your
home. In some relatively high-tax areas of the country, 5% to 6% is more common.
Some settlement costs, such as homeowner’s insurance, private mortgage insurance,
or points, can be more expensive if your credit rating is low. Knowing your credit
score can help you understand how lenders will evaluate your applications. Beginning
December 2004 your lender is required to give you a copy of your credit score.
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Mortgage- and Lender-Related Settlement Costs
Most people associate settlement costs with mortgage loan charges. These fees and
charges vary, so it pays to shop around for the best combination of mortgage terms
and settlement costs. Mortgage-related costs that may apply to your loan include
the following items.
Application fee
Imposed by your lender or broker, this charge covers the initial costs of processing
your loan request and checking your credit report.
Estimated cost: $75 to $300, including the cost of the credit report for each applicant
Loan origination fee
The origination fee (also called underwriting fee, administrative fee, or processing
fee) is charged for the lender’s work in evaluating and preparing your mortgage
loan. This fee can cover the lender’s attorney’s fees, document preparation costs,
notary fees, and so forth.
Estimated cost: 1% to 1.5% of the loan amount
Points
Points are a one-time charge imposed by the lender, usually to reduce the interest
rate of your loan. One point equals 1% of the loan amount. For example, 1 point
on a $100,000 loan would be $1,000. In some cases--especially in refinancing--the
points can be financed by adding them to the amount that you borrow. However, if
you pay the points at settlement, they are deductible on your income taxes in the
year they are paid (different deduction rules apply when you refinance or purchase
a second home). In your purchase offer, you may want to negotiate with the seller
to have the seller pay your points.
Estimated cost: 0% to 3% of the loan amount
Appraisal fee
Lenders want to be sure that the property is worth at least as much as the loan
amount. This fee pays for an appraisal of the home you want to purchase or refinance.
Some lenders and brokers include the appraisal fee as part of the application fee;
you can ask the lender for a copy of your appraisal. If you are refinancing and
you have had a recent appraisal, some lenders may waive the requirement for a new
appraisal.
Estimated cost: $300 to $700
Lender-required home inspection fees
The lender may require a termite inspection and an analysis of the structural condition
of the property by an engineer or consultant. In rural areas, lenders may require
a septic system test and a water test to make sure the well and water system will
maintain an adequate supply of water for the house (this is usually a test for quantity,
not for water quality; your county health department may require a water quality
test as well, but this test may be paid for outside of the settlement). Keep in
mind that this inspection is for the benefit of the lender; you may want to request
your own inspection to make sure the property is in good condition.
Estimated costs: $175 to $350
Prepaid interest
Your first regular mortgage payment is usually due about 6 to 8 weeks after you
settle (for example, if you settle in August, your first regular payment will be
due on October 1; the October payment covers the cost of borrowing the money for
the month of September). Interest costs, however, start as soon as you settle. The
lender will calculate how much interest you owe for the part of the month in which
you settle (for example, if you settle on August 16, you would owe interest for
15 days--August 16 through 31).
Estimated cost: Depends on loan amount, interest rate, and the number of days for
which interest must be paid (for example, a $120,000 loan at 6% for 15 days, about
$300; a $142,500 loan at 6% for 15 days, about $356)
Private mortgage insurance (PMI)
If your down payment is less than 20% of the value of the house, the lender will
usually require mortgage insurance. The insurance policy covers the lender’s risk
in the event that you do not make the loan payments. Typically, you will pay a monthly
premium along with each month’s mortgage payment. Your private MI can be canceled
at your request, in writing, when you reach 20% equity in your home, based on your
original purchase price, if your mortgage payments are current and you have a good
payment history. By federal law your private MI payments will automatically stop
when you acquire 22% equity in your home, based on the original appraised value
of the house, as long as your mortgage payments are current.
Estimated cost: 0.5% to 1.5% of the loan amount to pre-pay for the first year
Some lenders will pay for private MI--called lender’s private mortgage insurance
(LPMI)--and in turn will charge a higher interest rate. Unlike private MI that you
pay, there is no automatic cancellation once you acquire 22% equity. To eliminate
the LPMI, you must refinance the loan, which in turn means carefully considering
market interest rates and settlement costs at the time to see if refinancing would
be an advantage, rather than keeping your current mortgage.
FHA, VA, or RHS fees
The Federal Housing Administration (FHA) offers insured mortgages and the Veterans
Administration (VA) and the Rural Housing Service (RHS) offer mortgage guarantees.
If you are getting a mortgage insured by the FHA or guaranteed by the VA or the
RHS, you will have to pay FHA mortgage insurance premiums or VA or RHS guarantee
fees. As with Private MI, insurance premium payments will stop when you acquire
22% equity in your home. FHA fees are about 1.5% of the loan amount. VA guarantee
fees range from 1.25% to 2% of the loan amount, depending on the size of your down
payment (the higher your down payment, the lower the fee percentage). RHS fees are
1.75% of the loan amount.
Homeowner’s insurance
Your lender will require that you have a homeowner’s insurance policy (sometimes
called hazard insurance) in effect at settlement. The policy protects against physical
damage to the house by fire, wind, vandalism, and other causes. This insures that
the lender’s investment will be secured even if the house is destroyed. If you are
buying a condominium, the hazard insurance may be part of your monthly condominium
fee; you may still want homeowner’s insurance for your furnishings and valuables.
Estimated cost: $300 to $1,000 (depending on the value of the home and the amount
of coverage; you can estimate the cost to be about $3.50 per $1,000 of the purchase
price of the home)
Flood determination fee
If your home is in a flood hazard area where federally subsidized flood insurance
is available, lenders cannot make a mortgage loan for your home unless you buy flood
insurance. Your lender may charge a fee to find out whether the home is in a flood
hazard area.
Estimated cost: $15 to $50 (this is not the cost for the flood insurance; flood
insurance, if required, would be in addition to your homeowner's insurance and may
cost from $350 to $2,800 depending on location and property value)
Escrow (or reserve) funds
Some lenders require that you set aside money in an escrow (reserve) account to
pay for property taxes, homeowner’s insurance, and flood insurance (if you need
it). Lenders use escrow funds to ensure that these items are paid on time to protect
their interest in your home. With an escrow account, money is held by the lender
or the lender’s agent, who then pays the taxes and insurance bills when they are
due. At settlement, you may need to provide some payment into this account, depending
on when payments will be due. For example, if you are buying your home in August
and property taxes are due the following January, you will need to deposit funds
into your escrow account at settlement so that you have enough to pay the taxes
when they become due in January.
Survey costs
Lenders require a survey to confirm the location of buildings and improvements on
the land. Some lenders require a complete (and more costly) survey to ensure that
the house and other structures are legally where you and the seller say they are.
Estimated cost: $150 to $400
Other miscellaneous settlement costs
Depending upon the location and type of property, and the extra services you or
your lender request, you may also have to pay some of the following fees at settlement:
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Assumption fee. If you are assuming (or taking over) an existing
mortgage, the lender may charge a fee.
Estimated cost: Depends on the lender, but will range from several hundred dollars
to 1% of the amount of the loan you are assuming
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Expenses prorated between the seller and the buyer. In your purchase
contract, you may agree to split some costs with the seller. In addition to prorated
property taxes, some of these expenses may involve large amounts. For example, annual
condominium fees, homeowners’ association fees, water bills, and other lump-sum
service charges may be split between you and the seller to cover your respective
periods of ownership for the calendar year or tax period.
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Inspections. As a buyer, if you make your purchase offer contingent
on the results of a home inspection--such as testing for structural damage, water
quality, and radon gas emissions--you will have to pay for these inspections.
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Escrow account funds. In the purchase contract, you can request
that the seller set up an escrow account to cover any costs for repairs, radon mitigation,
house painting, or other items. For example, if you have not had a chance to test
all the appliances (for instance, if you buy in the summer, you may not test the
furnace), you may request an escrow account to cover repairs if they are needed
in the future. The seller may agree to split the costs with you, in which case you
would need these funds at settlement.
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Fees paid to find a lender. As a buyer, you may work with a mortgage
broker or other third party to find a mortgage loan. For example, you may want to
work with a broker to find a loan with nonstandard terms or conditions. Brokers
arrange transactions rather than lending money directly; in other words, they find
a lender for you. Brokers will generally contact several lenders regarding your
application, but they are not obligated to find the best deal for you unless they
have contracted with you to act as your agent.
Estimated cost: Depends on agreement with the broker; can range from no fee to a
percentage of the loan amount
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Charges for Establishing and Transferring Ownership
Title search
The goal of a title search is to assure you and your lender that the seller is the
legal owner of the property and that there are no outstanding claims or liens against
the property that you are buying. The title search may be performed by a lawyer,
an escrow or title company, or other specialist.
Public real estate records can be spread among several local government offices,
including surveyors, county courts, tax assessors, and recorders of deeds. Liens,
records of deaths, divorces, court judgments, and contests over wills--all of which
can affect ownership rights--must also be examined.
If real estate records are computerized, the title search can be completed fairly
quickly. In some cases, however, the title search may involve visiting courthouses
and examining other public records and files, which is more time-consuming.
Title insurance
Most lenders require a title insurance policy. This policy insures the lender against
an error in the results of the title search. If a problem arises, the insurance
covers the lender’s investment in your mortgage.
The cost of the policy (a one-time premium) is usually based on the loan amount
and is often paid by the buyer. However, you may negotiate with the seller to pay
all or part of the premium.
The title insurance required by the lender protects only the lender. To protect
yourself against title problems, you may want to buy an “owner’s” title insurance
policy. Normally the additional premium cost is based on the cost of the lender’s
policy, but this premium can vary from area to area.
Some advice on keeping title insurance costs low: If the house you are buying was
owned by the seller for only a few years, check with the seller’s title company.
You may be able to get a “re-issue rate,” because the time between title searches
was short. As well, if you are refinancing, you may be able to get a “re-issue rate”
on your title insurance. The premium is likely to be lower than the regular rate
for a new policy. If no claims have been made against the title since the previous
title search was done, the insurer may consider the property to be a lower insurance
risk.
Usually you will have to buy title insurance from a company acceptable to your lender.
However, you can still shop around for the best premium rates (which can vary depending
on how much competition there is in a market area). If you decide to buy an “owner’s
title policy,” look for one with as few exclusions from coverage as possible. Exclusions
are listed in each policy, and if a policy has many exclusions--that is, situations
under which the insurer will not pay for your title problems--you may end up with
little coverage. The estimated cost of title services and title insurance varies
by state. For example, a lender’s policy on a $100,000 loan can range from $175
in one state to $900 in another. In some states, the price can even vary by county.
Settlement companies and others conducting the settlement
Settlements are conducted by title insurance companies, real estate brokers, lending
institutions, escrow companies, or attorneys. In most cases, the settlement agent
is providing a service to the lender, and you may be required to pay for these services.
You can also hire your own attorney to represent you at all stages of the transaction,
including settlement.
You may be involved in some of the closing activities and not in others, depending
on local practices and on the professionals with whom you are working. In some regions,
all the people involved in the sale--the buyer; the seller; the lender; the real
estate agents; attorneys for the buyer, seller, and lender; and representatives
from the title firm--may meet to sign forms and transfer funds. In other regions,
settlement is handled by a title or escrow firm that collects all the funding, paperwork,
and signatures and makes the necessary disbursements. The firm delivers the check
to the seller and the house keys to you.
Costs for settlement services vary widely, depending on the professional services
involved. Regardless of the way settlement is handled in your region, shop around
and ask for information on all services provided and all fees charged.
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Amounts Paid to State and Local Governments
In some parts of the country transfer and recording fees are low. In other parts
of the country costs of transfer fees, recording fees, and property taxes collected
by local and state governments may be as much as 1.25% of the loan amount. Some
of these fees, such as the recording fee and transfer fee, are one-time fees. Although
there is no way to avoid paying these fees and taxes, you may be able to negotiate
with the seller to pay some of these costs. But remember, you must include these
terms as part of the purchase offer for the property.
Amounts for property taxes may go into an escrow account. The amount you will need
depends on when property taxes are due and the timing of the settlement. The lender
should be able to give you an approximation of these costs at the time you apply
for the mortgage.
“All-in-One” Pricing of Settlement Costs
Some lenders have bundled most of their settlement costs into a single price. Generally,
they combine the following fees:
This all-in-one price, however, does not include all of the fees needed at settlement.
You will also need funds for the following:
prepaid interest (based on the day
of the month you settle)
mortgage and transfer taxes (determined
by your state or local taxing agency)
private mortgage insurance (if needed)
homeowner's (hazard) insurance
flood insurance (if needed)
and reserve (or escrow) funds for
property taxes and homeowner's insurance.
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Estimates of Settlement Costs
At various points in your loan application process, you are entitled to get estimates
of the costs and fees associated with getting a mortgage and going through settlement.
The “good faith estimate”
With such a long list of potential charges at settlement, it is important to know
what to expect. The Real Estate Settlement Procedures Act (RESPA) requires your
mortgage lender to give you a “good faith estimate” of all your closing costs within
3 business days of submitting your application for a loan, whether you are purchasing
or refinancing the home. This is a good faith estimate, but the actual expenses
at closing may be somewhat different. If you are purchasing the home, you will also
get an information booklet, Buying Your Home: Settlement Costs and Helpful Information.
Truth in lending information
For home purchases, the lender is required, under the Truth in Lending Act, to provide
a statement containing “good faith estimates” of the costs of the loan within 3
business days of submitting your application. This estimate will include your total
finance charge and the annual percentage rate (APR). The APR expresses the cost
of your loan as an annual rate. This rate is likely to be higher than the stated
contract interest rate on your mortgage because it takes into account discount points,
mortgage insurance, and certain other fees that add to the cost of your loan. When
refinancing your mortgage, you will receive the truth in lending disclosures before
you settle.
The “HUD-1” statement
When you purchase a home or refinance your mortgage, the Real Estate Settlement
Procedures Act also requires the lender to give you a copy of the HUD-1 or HUD-1A
Settlement Statement 1 day before you go to settlement, if you request it. This
final statement of settlement costs will show all the fees and charges you will
be expected to pay at settlement.
Fees paid outside of settlement
Some fees may be listed on the HUD-1 and marked as “Paid Outside of Closing” (or
“POC”). You will pay some of these fees, such as for credit reports and appraisals,
before settlement. Other fees, such as those to a mortgage broker, you will pay
at settlement.
Sample Settlement Costs
Because costs may vary from one area to another and from one lender to another,
the following example is an estimate only. This example is based on a $150,000 home
with a 5% or a 20% down payment. Excluding reserves for property taxes and down
payment, settlement costs for the 5% down payment loan vary between $4,690 and $13,940;
settlement costs for the 20% down payment loan vary between $4,285 and $12,060.
Your costs may be higher or lower than the examples below.
Item
|
Typical range
(percent except
as noted)
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Estimate for $150,000 house
(in dollars except as noted)
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5% down
payment
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20% down
payment
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Down Payment
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--
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7,500
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30,000
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Mortgage amount
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--
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142,500
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120,000
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Items payable in connection with the loan ("800" series on HUD-1 form)
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Application fee
(may include credit report fees)
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--
|
75 to 300
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75 to 300
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Loan origination fee
(may also include underwriting fees, administrative fees, lender's attorney fees,
notary fees, and so on)
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1 to 1.5 of loan
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1,452 to 2,137
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1,200 to 1,800
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Points
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0 to 3
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0 to 4,500
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0 to 3,600
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Appraisal fee
|
--
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350 to 700
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350 to 700
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Lender's inspection fee
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--
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175 to 350
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175 to 350
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Assumption fee (if applicable)
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$300 to $1,000
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--
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--
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Broker fee (if applicable)
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1
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1
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1
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Items payable in advance ("900" series on HUD-1 form)
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Prepaid interest
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2
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350
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295
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Homeowner's insurance
(hazard insurance)
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$500 to $700
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5253
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5253
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Flood determination
(flood insurance, if needed, is additional)
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--
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15 to 50
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15 to 50
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Reserves (escrow) deposited with lender ("1000" series on HUD-1 form)
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Homeowner's insurance
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--
|
250 to 350
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250 to 350
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PMI
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--
|
125 to 250
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--
|
Property taxes
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4
|
--
|
--
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Title charges ("1100" series on HUD-1 form)
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Title search and lender's title insurance
|
--
|
700 to 900
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700 to 900
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Owner's title insurance
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--
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--
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--
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Government recording and transfer fees ("1200" series on HUD-1 form)
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Recording fees for deed, mortgage, city/county taxes, and state taxes
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0 to 1.5 of loan
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0 to 2,137
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0 to 1,800
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Additional charges ("1300" series on HUD-1 form)
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Survey
|
--
|
150 to 300
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150 to 300
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Pest inspection
|
--
|
50 to 90
|
50 to 90
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Settlement fees
|
--
|
500 to 1,000
|
500 to 1,000
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Other amounts due from borrower ("100" series on HUD-1 form)
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Personal property; assessments; prorated condominium fees; homeowners' association
fees; prorated taxes; fuel, oil, and propane; and so forth
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5
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5
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5
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Note:
"--" = not applicable
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1.
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May be a dollar amount or a percentage. Return to table
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2.
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Depends on interest rate, the day of the month that settlement takes place, and
the amount borrowed. The example assumes that there are 15 days left in the month
and that the interest rate on the loan amount is 6%. Return to table
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3.
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These are the fees if using $3.50 per $1,000 of purchase price as an estimate. Return to table
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4.
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Varies greatly and depends on local tax rates. Return to table
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5.
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These items vary depending on your agreement with the seller. Return to
table
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Settlement Cost Tips
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Think about settlement fees before you submit your purchase offer.
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Remember many fees and charges are negotiable.
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Use the Settlement Costs Worksheet and compare costs by shopping among several lenders
and brokers.
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This information has been prepared to help you make the important decisions involved
in buying and financing your home. However it should not be viewed as a replacement
for professional advice. Talk with attorneys, mortgage lenders, real estate agents,
and other advisers for information about lending practices, mortgage instruments,
and your own interests before you commit to a specific loan.
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More information
on settlement costs and mortgages |
Settlement costs worksheet
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