Closing costs are the actual expenses that the lender incurs in the origination of a new home loan. Some of the costs are related to your loan application, such as the expense of newly updated credit reports on all applicants. Other fees are related to the house itself, such as the appraisal of the property. Others are payment to the lender for processing your application, such as the loan origination fee. This area of expenses is charged to the buyer, and often runs between 2 and 3 percent of the amount being borrowed.
Loan discount points are a form of prepaid interest. One discount point is exactly equal to one percent of the amount being borrowed. It is paid in cash at closing to the lender as a form of interest. Discount points have the effect of lowering the stated interest rate you will pay on the loan you obtain.
Finally, there is the issue of prepaid items. An escrow account is nothing more than a savings account that the lender holds. Every month you will, in addition to your regular loan payment, deposit a sum for property taxes and for home owners insurance into this account. And when the next bill comes due for taxes or insurance, your lender will make the payment for you. On the day of your purchase, you will be required to set up an escrow account with about 9 months worth of taxes and about 2 months worth of insurance payments. In addition, you will have to pay for the first year’s insurance policy in full.