Closing Costs Explained
Interest
Lenders usually require that borrowers pay at settlement the
interest that accrues on the mortgage from the date of
settlement to the beginning of the period covered by the
first monthly payment. For example, suppose your settlement
takes place on April 16, and your first regular monthly
payment will be due on June 1, with prepaid interest charges
for the month of May. On the settlement date the lender will
collect interest for the period from April 16 to May 1. If
you borrowed $60,000 at 12 percent interest, the interest
collected would be $303.30.
Mortgage Insurance Premium
Mortgage insurance protects the lender from loss due to
payment default by the borrower. The lender may require you
to pay your first premium or a lump sum premium covering the
life of the loan in advance, on the day of settlement. the
premium may cover a specific number of months, a year in
advance or the total amount. With this insurance protection,
the Lender is willing to make a larger loan, thus reducing
your down payment requirements. This type of insurance
should not be confused with mortgage life, term, or
disability insurance designed to pay off a mortgage in the
event of physical disability or death of the borrower.
Hazard Insurance Premium
This premium prepayment is for insurance protection for you
and the lender against loss due to fire, windstorm, and
natural hazards. This coverage may be included in a
Homeowners Policy which insures against additional risks
which may include personal liability and theft. Lenders
often require payment of the first year's premium at
settlement.
A hazard insurance or homeowner's policy may not protect you
against loss caused by flooding. If your mortgage is
Federally insured and your property is within a special
flood hazard area identified by FEMA, you may be required by
Federal law to carry flood insurance on your home. Such
insurance may be purchased in participating communities
under the National Flood Insurance Act.
Reserves Deposited with Lenders
Reserves (sometimes called "escrow" or "impound" accounts)
are funds held in an account by the lender to assure future
payment for such re-occurring items such as real estate
taxes and hazard insurance.
You will probably have to pay an initial amount for each of
these items to start the reserve account at the time of
settlement. A portion of your regular monthly payments will
be added to the reserve account. RESPA places limitations on
the amount of reserve funds which may be required by the
lender.
Hazard Insurance
The lender determines the amount of money that must be
placed in the reserve in order to pay the first insurance
premium when due.
Mortgage Insurance
The lender may require that part of the total annual premium
be placed in the reserve account at settlement. The portion
to be placed in reserve may be negotiable.
City/County Property Tax
The lender may require a regular monthly payment to the
reserve account for property taxes.
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