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Closing Costs
Because settlement practices vary significantly based on your locale, it is difficult to provide reliable estimates
for costs that fit every settlement situation you may encounter. 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, however, 5% to 6% may be 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, too. Knowing your credit score, therefore, can help you understand
how lenders will evaluate your applications and how that score may impact the cost of your mortgage loan
and help you to anticipate your settlement costs. Your lender is required to give you a copy of your credit
score as part of the settlement process. Make sure you get a copy of your score.

Understand the types of 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: $65 to $640, including the cost of the credit report for each applicant Median cost: $365

Loan origination fee

The origination fee (also called underwriting fee, administrative fee, or processing fee) is charged by the
lender for evaluating and preparing your mortgage loan. This fee can cover the lender's attorney's fees,
document preparation costs, notary fees, and similar charges.

Estimated cost: $2,130 to $3,105 with a 5% down payment; $1,984 to $2,865 with a 10% down payment

Median cost: $2,734 with a 5% down payment; $2,537 with a 10% down payment


Points are a one-time charge that may be negotiated with the lender, usually to reduce the interest rate you
pay over the life of your loan. One point equals 1% of the loan amount. For example, one point on a
$100,000 loan would be $1,000. In some cases--especially in refinancing--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 all or a
portion of the points.

Estimated cost: 0% to 3% of the loan amount

Appraisal fee

Lenders want to be sure that the purchased property is worth at least as much as the loan amount. An
appraisal pays for a determination of the value of the home and lot you want to purchase or refinance. Some
lenders and brokers include the appraisal fee in the application fee; you can ask the lender for a copy of the
appraisal. If you are refinancing and have a recent appraisal of the property, some lenders may waive the
requirement for a new appraisal.

Estimated cost: $263 to $444

Median cost: $292

Lender-required home inspection fees

Lenders 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 (if applicable) 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 water quantity and not quality; your local health department may require a water quality test as well,
but may do so outside the settlement process and with a separate payment). Keep in mind that such
inspections are for the benefit of the lender; you may want to request your own inspection to make sure the
property is in good/acceptable condition.

Estimated cost: $300 to $500

Prepaid interest

Your first regular mortgage payment is usually due about six to eight 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 the loan amount, interest rate, and number of days since settlement (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 losses if you do not make the loan payments. Typically,
you will pay a PMI monthly along with each month's mortgage payment. Your PMI 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 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.

Estimated cost: $50 to $100 per month

Some lenders will pay for LPMI--or lender's private mortgage insurance--and, in turn, charge a higher
interest rate to you. Unlike the PMI that you might pay, with LPMI there is no automatic cancellation of the
insurance charge once you acquire 22% equity. To eliminate 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 advantageous to you, rather than keeping your current mortgage and its attendant costs.

FHA, VA, and 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, FHA insurance premium payments will stop when you acquire 22%
equity in your home. FHA fees are about 1.75% of the loan amount.1 VA guarantee fees range from 1.25%
to 3.3% of the loan amount, depending on the size of your down payment (the higher your down payment,
the lower the fee percentage).2 RHS fees are 2.00% of the loan amount.3

Homeowner's insurance

Your lender will require that you arrange for homeowner's insurance coverage (sometimes called hazard
insurance) at settlement. This insurance protects against physical damage to the house by fire, wind,
vandalism, and other causes, and ensures that the lender's investment in your purchase will be secured even if
the house is destroyed. If you are buying a condominium, hazard insurance may be part of your monthly
condominium fee; you may also want to secure insurance coverage for your home furnishings and valuables.

Estimated cost: $300 to $1,000 (Depending on the value of the home and the amount of coverage; you can
expect a cost of about $3.50 per $1,000 of the home purchase price.)

Flood determination fee

If your home is in a special flood hazard area where flood insurance is mandated, lenders cannot offer you a
mortgage loan unless you buy flood insurance. Regardless, your lender may charge a fee to find out whether
the home is in a flood hazard area. Flood insurance protects the lender if flooding damages or destroys your

Estimated cost: $10 to $16 for the search (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 $500 to $5,925 depending
on location and property value and loan balance.4 )

Escrow (or reserve) funds

Some lenders require that you set aside money in an escrow (or reserve) account to pay for property taxes,
homeowner's insurance, and flood insurance (if applicable). Lenders use escrow funds to ensure that these
items/expenses are paid on time and to protect their interest in your home. With an escrow account, money is
held by the lender or its agent, which then pays the taxes and insurance bills when they are due. At settlement,
you may need to provide funds for this account, depending on when payments will be due. For example, if
you buy 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 can cover tax payments when they are due in

Property Survey costs

Lenders require a property survey to confirm the location of buildings and improvements on the land you are
purchasing. 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: $84 to $600

Median cost: $154

Other miscellaneous settlement costs

Depending upon the location and type of property purchased--and the extra settlement services you or your
lender request--you may also have to pay some of the following fees and assessments.

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.

Prorated expenses between the seller and the buyer. In your purchase contract, you may agree to split some
costs with the seller to cover your respective periods of ownership during the overarching calendar year or
tax period, such as 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

Estimated cost: Depends on the agreement between the seller and the buyer.

Inspection costs/fees. 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.

Estimated cost: Costs vary regionally.

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 do not 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. Sellers sometimes offer home warranties in lieu
of these arrangements and as an enticement to buyers. These warranties typically cover repairs or the
replacement of plumbing and heating, major appliances, and other home systems not covered by other home
insurance policies.

Estimated cost: Depends on cost of repairs and agreement between seller and buyer.

Fees paid to find a lender. As a borrower and buyer, you may work with a mortgage broker or other third
party to secure 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 lend 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

Estimated cost: Depends on agreement with the broker and often is a percentage of the loan amount.

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Learn about charges to establish and transfer 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.

Title searches can be time- and labor-intensive. 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.

Estimated cost: Costs vary regionally.

Title insurance

Most lenders require a title insurance policy to protect 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 it can vary based on your locale.

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/scant

Estimated cost: The 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 settlement agents

Settlements are conducted by title insurance companies, real estate brokers, lending institutions, escrow
companies, or attorneys. In most cases, the settlement agent provides 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.

In some regions, all parties 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, which collects all the funding,
paperwork, and signatures and makes the necessary disbursements. This firm delivers the check to the seller
and the house keys to you.

Estimated cost: Costs for settlement services vary widely, depending on the services provided. 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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Consider state and local government fees and taxes

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
3% 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
assume some of these costs. But remember, you must include these terms in the purchase offer for the

Funds to cover 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.

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Understand "all-in-one" pricing of settlement costs

Some lenders have bundled most of their settlement costs into a single price. Generally, bundled
arrangements combine the following fees:

underwriting and processing
pest inspection

credit reports
lender's attorney
flood certification
title search and title insurance
recording, and
fees for other tax services

This "all-in-one" price, however, does not include all of the fees charged 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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Ask for estimates of settlement costs

At various points in the loan application process, you are entitled to estimates of the costs and fees associated
with arranging your mortgage and completing the settlement process.

"Good faith estimate" (GFE)

With such a long list of potential charges at settlement, it is important to know which ones will apply to your
purchase. The Real Estate Settlement Procedures Act (RESPA) requires your mortgage lender to give you a
"good faith estimate" of all your expected closing costs within three business days of the submission of your
loan application, whether you are purchasing or refinancing the home. Although called a good faith estimate, it
is important to note that your actual expenses at closing may be somewhat different. The standardized GFE
form lists which costs will change prior to settlement and the maximum amount by which they are allowed to
change. If you are purchasing the home, a booklet provided by your broker or mortgage lender, Buying Your
Home: Settlement Costs and Helpful Information5, explains the role of the good faith estimate in the
settlement process.

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 three business days after receiving 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 can
add to the cost of your loan. When refinancing your mortgage, you will receive truth-in-lending disclosures
before you settle. Until you receive those disclosures, the creditor and other parties cannot charge you fees
related to your loan application, except for a fee for obtaining your credit history.

"HUD-1/HUD-1A" statement

When you purchase a home or refinance your mortgage, RESPA also requires the lender to give you a copy
of your HUD-1 or HUD-1A Settlement Statement the 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.
The HUD-1 also states the initial terms of the loan, including the monthly amount due.

The revised HUD-1 is designed for easy comparison with your good faith estimate. Most costs in the "800"
to "1300" series of the HUD-1 form are labeled with the corresponding section of the GFE for reference.
Included in the HUD-1 are comparison charts for the estimated costs provided on the GFE and actual costs
paid at closing. These will be completed by the settlement agent for you before closing with information
provided by your lender.

Fees paid outside of settlement/closing

Some fees may be listed on the HUD-1/HUD-1A 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 your direct payments to a mortgage broker, you will pay at settlement. Payments by other parties, for
example, from the lender to the mortgage broker, also may be marked as "POC."