Mortgage Settlement
Lender-Related Closing Costs and Fees
Private Mortgage Insurance (PMI) Costs :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 (fee) along with each month's mortgage payment. Estimated cost: 0.5% to 1.5% of the loan amount to pre-pay for the first year.
Private mortgage insurance (PMI) can be canceled at your request, in writing, when your 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 PMI 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. For more information, see our guide on how PMI cancellation works.
Some lenders will pay for PMI, called lender's private mortgage insurance (LPMI), and in turn will charge a higher interest rate. Unlike PMI that you pay, there is no automatic cancellation once you acquire 22% equity. To eliminate the LPMI, you must refinance the loan, which means carefully considering market interest rates and closing 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 PMI, 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 homeowners 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.
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