Many people misunderstand closing costs when obtaining a mortgage loan, but understanding them is crucial. Closing costs are the fees you pay upfront to apply for and secure a mortgage, although some fees may get included in the loan.
Understanding Closing Costs
Typically, closing costs account for between 2% and 6% of the borrowed amount. That means that if you were to purchase a home and borrow $400,000 for it, you would end up paying between $8,000 and $24,000 in closing costs. As you work to save for a down payment, you’ll also want to take the time to save for these costs, too.
So, what exactly are you paying for here? Closing costs are fees for various organizations' expenses and services in the application and closing process.
The law requires lenders to disclose closing costs in their initial Loan Estimate. This document estimates the loan's interest rate, monthly payment, and closing costs. It itemizes the costs to show where your money goes, including fees like the appraisal fee, credit report fee, origination fee, and more.
Additionally, you should receive a Closing Disclosure at least three days before closing. This document is similar to the Loan Estimate but provides the final, actual costs of the loan. It allows you to compare the estimated costs to the final ones. It also provides a detailed breakdown of the mortgage loan terms, such as the interest rate, monthly payments, and the amount you'll pay over the life of the loan.
It's essential to review all these documents carefully and ask questions if there's anything you don't understand. Your real estate agent, lender, or attorney can provide guidance.
Common Closing Costs
The following are some of the most common closing costs and estimates for them. Remember that the cost you will pay depends on many factors, including where you live, what the lender charges, and who you obtain the loan through. These are estimates.
Origination fees
The loan origination fee is the cost of both processing and underwriting the loan charged to you by the underwriter. They typically account for about 1% of the loan’s value. They include costs associated with creating the paperwork and verifying your application.
Appraisal fees
Appraisals are a requirement for most mortgages. The lender will come to the home, evaluate the condition, determine the value of it, and then report that to the mortgage lender. Appraisal fees are paid for by you, generally at the time of obtaining them, and range from $300 to $600.
Credit report fees
Credit report fees range from $10 to $100 and account for the cost of pulling a copy of your credit report and, in some cases, evaluating that report by the lender.
Title insurance and title search fees
Title search fees are required to research the property title you are buying. The goal is to ensure no one else has a legal claim and you have the right to buy it. Typically, this accounts for $200 to $400 in fees for the title search. You can also purchase title insurance, a type of insurance product put into place that promises to cover your losses if, after stating there are no liens on the property, one is later found.
Survey fees
You pay survey fees to the local city or county to verify the parcel of land you're purchasing. That helps establish the property lines for the home purchase. The costs typically range from $100 to $125 but vary based on location.
Underwriting fees
The lender charges an underwriting fee for reviewing and approving the details of your loan application and approving it. It is the cost charged for verifying all the information you have provided. Sometimes, underwriting fees can take $700 or more, depending on the lender.
Property tax and insurance escrows
You pay property taxes to the county, and once the loan is in place, insurance companies require payments for the home. Therefore, lenders set up property tax and insurance escrows. You might need to cover these costs at the time of transferring ownership.
Discount points
You can pay for discount points when you secure the loan. You can reduce your interest rate by purchasing these points from the lender. Typically, buying one point will decrease your loan's interest rate by 1%, helping you save on interest in the long run.
Recording fees
You typically pay the local city or county government a recording fee to update public land ownership records. After you purchase the home, they will use this fee to register the land under your name.
Attorney fees (if applicable)
You may pay attorney fees in some states. Not all states require that you have an attorney complete and oversee the mortgage process, but some do. Where this applies to you, you can expect to pay $100 or more for the services.
Seller’s vs. Buyer’s Closing Costs
Who pays closing costs? Typically, the home buyer will pay closing costs like those listed here. Sometimes, the seller can pay some of these closing costs.
However, sellers also typically have to pay additional closing costs. That includes the costs paid to the real estate agent they use to market the home. These and other costs can amount to 8% to 10% of the sell price of the home.
Paying Closing Costs
Typically, you pay closing costs when closing on the loan. However, some lenders will allow you to wrap those costs into the mortgage loan, meaning you do not have to pay all those out-of-pocket now.
Closing Disclosure Requirements
Also, note that you will sign several documents during the closing process. Within that list of documents will be a closing disclosure that outlines all of the costs you are paying. Ask questions if you’re not sure of any of these costs.
Takeaways
Closing costs are a big part of obtaining a mortgage. Don’t overlook the importance of having accurate documents that outline every bit of information – and if you don’t understand, you have the right to question any fees charged to you.