When you're buying a home with a mortgage, it's important to understand the type of fees you might incur. Most people are familiar with the term closing costs, or the genuine third-party costs that are associated with the closing of a real estate transaction, and expect to pay these expenses when they purchase a property. On top of closing costs, you have various expenses related to the finalization of your purchase or loan. These items, when added to your closing costs, are known as settlement fees.
What Are Closing Costs?
Closing costs are the legitimate third-party expenses you incur when you buy a property. These are expenses that you would never get back even if you sold the home a day after you closed on it. Examples include the loan application fee, points, title search fees, appraisal fee, home inspection fees, escrow fees, credit reports, courier fees, attorney fees, recording fees and transfer taxes.
What's the Settlement Fee Definition?
When you close the mortgage loan, on top of the closing costs, you're going to pay interest on the new mortgage from the day you close until the day the first monthly mortgage payment is due. You're also going to pay your share of the property taxes and HOA fees the seller has paid upfront for the property from the closing date to the end of the month. On top of that, the lender will collect escrow reserves upfront on account of future property taxes and homeowner's insurance. And don't forget the down payment. That's required at closing, too, and it goes towards the equity in your home.
These costs are not technically "closing costs" because they're associated with your future home ownership and not the closing of the loan. You would get some or all of these costs back if you sold the home tomorrow. Nonetheless, they're still required at closing, so it's a matter of semantics whether you call them closing costs or not.
If you combine all these various sums together and add them to the genuine closing costs, you get a complete account of everything you need to purchase the property. This total amount is what real estate professionals are referring to when they talk about "settlement costs," "settlement expenses" or "settlement fees."
Are Settlement Fees Different From Closing Costs?
Quick answer: not really. It's not uncommon to mix the two terms up or, more accurately, lump the settlement fees and closing costs together because a "settlement statement" is another document that's involved in buying a property – more on that below. Many real estate professionals, including lenders and brokers, use the terms interchangeably.
How Do You Calculate Settlement Costs?
Right at the beginning of your loan application, you'll get a good faith estimate. This document outlines all the fees you should expect to pay for your mortgage such as the loan application fee, appraiser's fees, points, title insurance, mortgage insurance and accrued mortgage interest from the closing date until the end of the month. It's an estimate of the total cost of buying the property and it's provided to help you compare the cost of different mortgage providers.
At least one day before closing, you'll get another document called the HUD-1 Settlement Statement. This looks a bit like the good faith estimate, only now it shows the true closing costs, including the final cost of items that could only be estimated before. The HUD is an itemized list of every expense involved in closing on a house: it shows all the settlement fees. It's worth finding a few examples online to check out the anatomy of the HUD statement. This will help you get a handle on the type of settlement fees you may be in for on your real estate transaction.
- the small plastic house image by Yuri Bizgaimer from Fotolia.com