What are Closing Costs?

When refinancing your home loan, you'll probably have to pay closing costs. Don't be mislead by zero point, zero fee loans. Even though the lender might appear to pay your closing costs, you'll likely pay a higher interest rate to reimburse the lender. Closing costs can be separated into two types: recurring and non-recurring.

• Non-recurring costs:  These are fees directly resulting from the loan transaction. They can be paid by you from savings, sometimes financed by adding them onto the loan amount, or "paid" by the lender.

• Recurring costs:  These are costs that you have to pay whether you refinance or not. However, when you refinance, you may have to pay them sooner than you otherwise would. These costs include property insurance, property taxes and prepaid interest on your new loan. If your new lender requires an impound or escrow account for taxes or insurance, you pay to setup this account. If your previous lender required an impound or escrow account, the balance will be reimbursed.

Here is a hypothetical example of a closing costs statement. Your situation will likely be different. Ask your loan officer to provide you with a similar estimate when you apply for a loan.

You may be wondering why there are so many fees associated with getting a loan. There are several parties providing various services in a real estate loan transaction. Relatively few charges provide profit for the lender or mortgage broker. The majority of fees are associated with services designed to protect the lender. Appraisal, credit, tax service, underwriting, mortgage insurance, hazard insurance, title and escrow, recording, etc., are all services which in some way protect the lenders interest.

Here is a brief description of the functions of some of the service providers associated with obtaining a real estate loan.

• Mortgage broker or loan officer. She helps you complete your loan application and is your main contact in the transaction. She collects supporting documents, orders all verifications (employment, deposits, etc.), and obtains your credit report. She should keep fully informed and should communicate with you regarding the status of the transaction. She may delegate many tasks to others while overseeing the entire process.

• Loan processor. She may be an employee of the financial institution from which you're getting your loan, or of the broker with whom you're working. The processor's tasks include checking your credit, ordering an appraisal, verifying your financials and packaging your file in the correct format for submission.

• Underwriter. She is usually an employee of the financial institution. She reviews your completed file, sees if it fits the lender's specifications, and issues your approval, conditional approval, or denial.

• Appraiser. She examines the property being purchased or refinanced, and provides a professional opinion of its value. The appraisal report is included in your file when it is delivered to the lender's underwriter.

• Escrow officer, title officer or attorney. Title and escrow are different services, but are usually offered by the same company. Title companies or attorneys receive all the funds involved in the transaction, account for them, make all payments to interested parties, and in the case of title companies, issue title insurance.