So, What Exactly ARE Mortgage Closing Costs?
Buying a home is a huge milestone! You’ve saved up for the down payment, found the perfect place, and gotten pre-approved for a mortgage. High five! But hold on, there’s one more financial hurdle to clear before you get the keys: closing costs.
Think of closing costs as the “behind-the-scenes” expenses that make your home purchase and mortgage official. They’re the fees paid to various people and services that help transfer ownership and finalize your loan. It’s not just one big fee, but a collection of smaller ones that add up.
How Much Moolah Are We Talking About?
Generally, you can expect closing costs to be between 2% and 5% of your total loan amount. So, if you’re borrowing $300,000, your closing costs could range from $6,000 to $15,000. It sounds like a lot, and it is, but knowing this upfront helps you budget effectively. Your loan estimate, which you’ll receive shortly after applying for a mortgage, will break down all these costs in detail.
Let’s Break Down Those Closing Costs:
Closing costs cover a wide array of services. Here’s a look at some common ones:
Lender Fees:
- Origination Fee: This is what the lender charges for processing your loan application. It’s often a percentage of the loan amount.
- Discount Points: If you choose to pay points to lower your interest rate, this fee is included here. Each point typically costs 1% of the loan amount.
- Underwriting Fee: Covers the cost of evaluating your loan application and assessing the risk.
- Loan Processing Fee: The administrative costs associated with preparing and processing your loan documents.
Third-Party Fees:
- Appraisal Fee: Pays for a professional appraisal of your home’s value to ensure it’s worth the loan amount.
- Title Search and Title Insurance: A title company researches public records to ensure the seller has clear ownership and no outstanding claims on the property. Title insurance protects you and the lender from future title disputes.
- Credit Report Fee: Covers the cost of pulling your credit history and scores.
- Attorney Fees: In some states, an attorney is required to be present at closing to review documents and facilitate the transfer.
- Flood Determination Fee: Checks if your property is in a flood-prone area, which may require flood insurance.
- Survey Fee: Determines the exact property boundaries.
- Recording Fees: Paid to your local government to record the new deed and mortgage in public records.
Pre-Paid Items and Escrows:
- Prepaid Interest: You’ll pay per diem interest from the closing date to the end of that month.
- Homeowners Insurance Premium: You’ll likely need to pay the first year’s premium upfront.
- Property Taxes: Lenders often require you to deposit a certain amount into an escrow account to cover future property tax bills.
Who Pays What?
While buyers typically cover most closing costs, some fees can be negotiated or paid by the seller. In competitive markets, sellers might offer credits towards closing costs to attract buyers. Conversely, some loan types, like certain FHA or VA loans, might have specific rules about who pays which fees.
Tips for Managing Closing Costs:
- Shop Around: Compare loan offers from different lenders. Fees can vary significantly.
- Ask Questions: Don’t hesitate to ask your loan officer to explain any fee you don’t understand.
- Negotiate: See if any fees can be reduced or waived, or if the seller can contribute.
- Consider a Lender Credit: Some lenders offer a slightly higher interest rate in exchange for a lender credit that covers some closing costs. Weigh this carefully against the long-term cost of the higher rate.
- Budget Accordingly: Factor these costs into your home-buying savings plan from the start.
Common Misconceptions:
- “Closing costs are the same everywhere.” Nope! Fees vary by lender, location, and even the specific services used.
- “My down payment covers everything.” Your down payment reduces the loan amount, but closing costs are separate expenses.
Closing costs are an unavoidable part of buying a home, but with careful planning and shopping around, you can manage them effectively.
Sources:
What Are Closing Costs?
Homebuyers Get Ready: Closing Costs