Most people associate closing costs with the finance charges levied by mortgage lenders. The charges you pay will vary among lenders, you may have to pay the following charges depending on your lender:

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Origination or application fees: These are fees for processing the mortgage application and may be a flat fee or a percentage of the mortgage. You will pay points only if you are buying down your rate.

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Inspections (termite, water tests): In most purchase scenarios, a termite inspection is required. In many rural areas, lenders will require a water test to make sure the well and water system will maintain an adequate supply of water to the house (this is usually a test for quantity, not a test for water quality).

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Points: A point is equal to 1% of the loan amount borrowed. Points can help you buy the rate down and get a lower rate. Points are typically tax deductible, but different deductibility rules apply to second homes. Your tax adviser can clarify these points for you.

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Document preparation fees: You will see an amazing array of papers, ranging from the application to the acceptance to the closing documents. This fee covers the cost of drawing docs.

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Preparation of amortization schedule: This is not common practice anymore.

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Land survey: Some lenders will require that the property be surveyed to make sure that no one has encroached on it and to verify the buildings and improvements to the property. This is only used under special circumstances as an appraisal is usually enough for most lenders.

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Appraisals: This is how the value of the home is verified. Recent comparable sales from local homes are used to gauge your home’s value.

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Credit report: A credit report is required on all purchase and refinance transactions. This is how the lender gauges your creditworthiness.

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Private Mortgage Insurance: If your down payment is less than 20%, many lenders will require that you purchase private mortgage insurance (PMI) for the amount of the loan. This way, if you default on the loan, the lender will recover lost monies. These insurance premiums will continue until your principal payments plus down payment equal 20% of the selling price, but they may continue for the life of the loan.

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Release fees: If the seller has worked with a contractor who has put a lien on the house and who expects to be paid from the proceeds of the sale of the house, there may be some fees to release the lien. Although the seller usually pays these fees, they could be negotiated in the purchase offer.

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Escrow account: An escrow account or impound account is a fund into which you will make monthly payments for taxes, homeowner’s insurance, and PMI (mortgage insurance, if required). These monies are collected on a monthly basis and will pay your insurance and tax bills when they come due every six month. The goal is to have these monies put aside in small amounts every month versus having a large lump sum bill come due every six months.

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Prepaid interest: Your first regular mortgage payment is usually due about 6 to 8 weeks after you close (for example, if you close in August, your first regular payment will be in October; the October payment covers the cost of borrowing money for the month of September). Interest costs, however, start as soon as you close. The lender will calculate how much interest you owe for the fraction of the month in which you close (for example, if you close on August 25, you would owe interest for 6 days). In some cases this is due at closing. In a refinance transaction you will also owe monies to your old lender. In the previous example you would owe 25 days to your old lender. In a refinance you are typically paying about one month’s worth of interest in the transaction every time you refinance. This is offset by the first month gap in which you will NOT make a mortgage payment immediately after refinancing.