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Closing Costs

Closing costs is one of the most misunderstood topics regarding homeownership, refinancing and purchasing a home. There are so many different things advertised everyday by big and small companies, stating things about no closing cost loans, paying points, having escrow accounts, no point mortgage loans, fixed closing cost mortgages, no origination fees, no title charges, no appraisal fee, etc... So what does it all mean? Closing costs are basically an inevitable part of buying a home. Even those companies advertising no closing costs are making it up in other ways such as increased interest rates, very difficult qualifying terms, and prepayment penalties insuring you remain with them for a certain number of years. Thus closing costs are paid in one form or another with every mortgage loan. How you pay for them depends upon what your lender offers and what you short and long term plans and goals are. Read on to find out more about closing costs in regards to mortgage loans.

Customary costs above and beyond the sale price of the property that must be paid to cover the transfer of ownership at closing; these costs generally vary by geographic location and are typically detailed to the borrower after submission of a loan application.

Most states put a cap on what Lenders can charge in fees related to closing cost.

There is a way to have your broker pay your closing costs on your behalf. Contact a mortgage professional to discuss whether this option would be right for you.

Even though the term "closing costs" are used loosely in the mortgage industry, closing costs should not be confused with "settlement costs." Settlement costs sum up all costs of the loan including pre paid items, interest, taxes, and insurance. When doing a refinance money in escrow with the current lender is refunded by check sent through the mail to your residence. Therefore if an escrow account is being set up again, all monies will have to be essentially re-collected since the two lenders do not transfer money from one escrow account to another, nor do they use the same one.

In a refinance transaction, the closing costs are typically included in the new loan, resulting in minimal "out of pocket" expenses for the borrower.

Although prepaids are on the Good Faith Estimate they are not actually closing costs. Prepaids are your interest per day which will depend on your closing date and the money that is in an escrow account if you are setting one up.

The costs paid by the mortgage borrower (and sometimes the seller) in addition to the purchase price of the property. These include the lender’s fees, title fees, and appraisal costs. Other fees could be applicable depending on your region. The Good Faith Estimate should provide a summary of all anticipated closing costs. This summary is approximate and should be re-evaluated just prior to closing to insure there have been no significant changes in closing costs.

The closing costs usually range between 2 percent to 6 percent of the loan amount. Expect to pay for such things as a loan origination fee, points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement.

In a refinance transaction, always check to see if the current mortgage has a prepayment penalty. A prepayment penalty can substantially increase your closing costs.

You can determine the breakdown of all the closing cost by reviewing your Good Faith Estimate that is provided by your loan officer.

Many closing costs are a fixed figure; however, some are percentage based depending on the loan amount. This will cause your closing costs to vary depending on the price of your home.

Typical Closing Costs for a homebuyer include, but not limited to, the following fees; Loan Origination, Loan Discount, Appraisal, Credit Report, Inspection, Mortgage Broker, Tax Related Service, Processing, Underwriting, Courier, Flood Certification, Flood Insurance, Hazard Insurance, Private Mortgage Insurance, Title Search, Title Insurance, Attorney, Recording, County Tax Stamps, and Survey.

The borrower’s first exposure to what closing costs are associated with the loan often is the Good Faith Estimate (GFE). While the GFE is an estimation it does give the borrower a solid understanding of what to expect when the loan is completed. When reviewing the GFE with your mortgage professional be sure to ask questions as they will be more than happy to answer.

Expenses, over and above the price of the property, incurred by buyers and sellers in transferring ownership of a property. Closing costs normally include an origination fee, an attorney's fee, taxes, an amount placed in escrow, and charges for obtaining title insurance and a survey. Closing costs percentage will vary according to the area of the country.

It is important to note that the Good Faith Estimate is only an ESTIMATE. Seldom does the GFE exactly represent the closing costs for a loan with a specific lender. For this reason, you should never do business with somebody based solely on the Good Faith Estimate. Many good brokers will overstate the amount of your closing costs, so you aren't surprised by an increase in costs when it comes time to close the loan. Conversely, many bad brokers will understate the amount of closing costs in order to lure you into doing business with them.

For this reason, you should not base your decision to do business with a specific person or company based solely on the GFE. Consider whether or not they seem honest, hard-working and fair. Ask them tough questions such as "How long have you been in the business?" or "How is it that you get paid?" or "How much do you make on a typical loan?" Questions like this will allow you to judge the character of the individual, in order to make an informed decision about who you should choose for a home loan.

The Closing Costs for your transaction will be itemized on the HUD-1 form at closing. This form lists all the details of the purchase or refinance, the money going into and out of the transaction. This form is generally finalized and available to the borrower, seller, Real Estate Agents and Brokers 24-48 hours before closing. All parties involved should review the HUD-1 at this time to identify any discrepancies. Depending on your situation and the timing of your closing this form may not be available until the day of closing.

As a buyer in the transaction you may ask the seller to contribute to your closing costs. In most cases the typical amount is 3% but this is not set in stone. It can be as high as 6% depending on what your lender will allow with the program you are using. This is a negotiable amount and not all sellers are willing to contribute. In areas of the country where the real estate market is really hot and you have buyers fighting for properties it can be more difficult to accomplish this. Always ask if the seller is willing to contribute to closing costs because you just might be surprised.

Closing costs do not have to be added to the loan. If you prefer you can pay them out of pocket. Most don't pay the costs out of pocket but instead wrap them into the loan.

When you compare mortgage offers, you have to know which fees to pay attention to and which costs to ignore until later.
It's worth taking the time to contrast loan offers. A survey of online mortgage lenders finds that their estimated fees vary widely. Some lenders are more thorough than others when they estimate the fees and taxes involved in a transaction, making it confusing to comparison-shop.

There are five kinds of closing costs:
- Fees that the broker or lender charges
- Fees that third parties control
- Taxes
- Title insurance
- Prepaid items

When you compare brokers and lenders, the first two types of costs are the ones to pay attention to. Fortunately, those are the costs that lenders are most likely to estimate correctly. On the other items -- taxes, title insurance and prepaid items -- the online lenders in Bankrate's survey are inconsistent, often incomplete and frequently inaccurate.

Borrowers first should scrutinize each lender's cost estimate and add up all the fees that the lender directly controls, plus third-party fees associated with getting the loan.
Lenders are aware that this isn't easy. Even if you get multiple quotes and compare them, it's still very difficult to go through and say, 'What am I really paying? What do I have to pay and what do I not have to pay?'

Many television advertisements offering no points no closing cost deals often roll these charges in somewhere else, often times attempting to deceive a customer at first glance.

Those closing costs that are paid to or for the benefit of your lender or mortgage broker are typically included in the calculation of your APR. Some examples of "APR costs" are underwriting fees, processing fees, tax service fees, flood certification fees and document preparation fees.

As part of the loan process, you are entitled to a booklet entitled, "Buying Your Home - A Guide to Settlement Costs". This booklet is a valuable source of information and will explain the settlement statement line by line so you are able to understand what you are signing at the closing.


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