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Loan settlement, mortgage settlement, refinancing, and mortgage closing can be confusing.  And while it may seem routine to the lender, it’s an experience that is often unfamiliar to the average consumer.  There are usually many long legal documents involved making it that much more intimidating.  It’s Click here to listenimportant to remember to take your time, and especially to understand everything you are signing!  Don’t be intimidated or rushed through the process.  Just because the other people at the closing or settlement seem to understand everything they will not be the person legally responsible for what you sign…you are!  If you don’t understand anything you’re signing, why you’re signing it, or what responsibility it puts on you, ASK QUESTIONS until you do understand.

To help prepare you for your loan settlement, here are a few terms to familiarize yourself with the process…

Application Fee – The fee you pay a lender or broker to cover the cost of processing your loan application.

Appraisal Fee – The fee paid to appraise the property you are buying (usually a home).  The appraisal sets the current value of the property so the loan value does not exceed the value of the property.

Escrow – Escrow is money held in reserve, usually to pay for such regular expenses such as property taxes or homeowner’s insurance.  Lenders often require escrow funds to make sure these items are paid, and their investment in your home is protected.

Home Inspection Fees – These are paid in order to assure that the house is structurally sound.  It may involve inspection by an engineer, and include inspection for termites.  It could also include inspection of septic and water systems if the house is not served by a community water/sewer system.

Insurance – Your lender will require you to have homeowner’s insurance, again to protect their investment in your home.  Depending on where you live, you may also be required to have flood insurance.

Loan Origination Fee – This is paid to lender for evaluating and preparing your loan.  It can include the lender’s legal fees, their cost of preparing the documents, and other items.  It may also be call the underwriting fee, the processing fee, or the administrative fee.

Points – Points are a fee charged by the lender up front to help reduce your interest rate.  One point equals 1% of the loan amount.  For example if your were borrowing $100,000 one point would equal $1,000. 

Prepaid Interest – This represents the interest cost of the loan from the time of settlement until your first payment is due.  Your first payment may not actually be due until 6 to 8 weeks after settlement, but your start paying interest immediately.  This fee covers the interest due in that period.

Private Mortgage Insurance (PMI) – If your down payment is less than 20% of the home’s value your lender will probably require Private Mortgage Insurance.  PMI insures the lender in case you don’t make your payments.  Usually this cost is included in your monthly payment.  Under federal law your PMI payments stops automatically stop when you have built up 22% (of the original appraised value of the house) equity in your home, as long as your mortgage payments are current.

There are other costs and items that may be included in a loan settlement depending on your type of loan, your location, and other circumstances.  The most important thing to remember is that when you sign any legal document you are the person responsible.  So make sure you understand what you are signing along with your responsibilities!