Surprises You Need To Know About Closing Costs


Surprise! This word has both good and bad connotations. Surprise parties, for example, are joyful occasions; (unless, that is, the ambush is staged as you’re returning from the gym, dripping with perspiration and runaway mascara). A demand for your wallet as you traverse a dark alley is of course, a bad surprise. Unfortunately, if you’re refinancing a home mortgage, unpleasant surprises in the guise of unexpectedly high closing costs may leave you feeling like your lender was the one doing the mugging.

SEE ALSO: Yes, You Can Change Mortgage Lenders Before Closing

Overpayment Phenomenon

Overpayment, also called “per diem interest,” is there to protect you should something delay your closing. It’s essentially comprised of a few days of extra interest payments on your new loan. Unfortunately, the total can really add up, especially on larger mortgages. If you were financing $600,000 at four percent, for example, your per diem interest would be about $67 per day. Over several few days, that can amount to hundreds of extra dollars you need to pay. While your lender will list this cost on the Good Faith Estimate you receive after submitting your loan application, the number of days required can change at the last minute. The good news is that they shouldreturn any overpayment to you within two weeks.

Property Tax Waylay

Most lenders require a monthly escrow payment to cover property taxes. If you refinance your mortgage with a different bank, you may be required to resubmit those funds upfront. The closer your tax due date, the more you’ll need to contribute at closing. Depending on the rates in your county, this can equate to thousands of additional dollars plus the 10 to 15 percent cushion many lenders demand. Fortunately, you should receive any remaining escrow funds paid to your old lender within two weeks of your closing. Compare the refund check to the escrow balance listed on the payoff letter to ensure accuracy.

Other Not-So-Little Surprises

While new mortgage rules adopted in January 2010 reduced the number of potential surprises byprohibiting lenders from increasing costs they control, (like origination or processing fees), other components of your closing bill may be higher than you expected. Fees for third-party services, including appraisals and title insurance, may vary by as much as 10 percent from the stated amounts on the Good Faith Estimate. If you happen to select your own providers instead of using those recommended by your lender, they could be even higher. How do you avoid a nasty surprise at closing? There may not be a perfect answer to this question. However, your best bet is to compare carefully the Good Faith Estimate to the HUD-1 statement, which contains a breakdown of settlement costs that your lender is required to give you before closing day. Budget accordingly to accommodate some variance in per diem interest, property tax escrow requirements and third-party charges.

SEE ALSO: The Escrow Fund: What It’s All About

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