Mortgage Closing Costs Explained Part 1
When it comes to saving money to buy or refinance a home, you’ve probably been pretty focused on the down payment. But you’ll also need to plan for closing costs, which are due when your loan closes.
Understanding what closing costs are, how much they’ll run on average, and what’s included can help eliminate any unexpected financial obstacles when you close on your new home.
Closing costs are fees levied when you take out a mortgage. Closing costs are paid at closing and typically range from 3% – 6% of the loan amount.
Closing costs are fees paid to cover the costs required to finalize your mortgage when you’re buying or refinancing a home. They’re paid at closing, the point in time when the title of the property is transferred to the buyer.
Most of the closing costs are paid by the buyer, but the seller typically will have a few to pay too, such as the real estate agent’s commission.
Lenders are required by law to provide a Loan Estimate within 3 business days of receiving your application. The estimate provides a detailed list of what you can expect in closing costs.
How Much Are Closing Costs?
Typically, closing costs average 3% – 6% of the purchase price. So, if you’re taking out a $200,000 mortgage on a house, you might pay $6,000 – $12,000 in closing costs.
Most buyers pay closing costs as a one-time, out-of-pocket expense when closing their loan.
If you need help with closing costs, check with state or local housing agencies to find out what may be available. Many offer low-interest loan programs or grants for first-time buyers. Another option is to take lender credits where you take a slightly higher interest rate in order to pay off the costs over the life of the loan rather than upfront.
You’ll pay higher closing costs if you choose to buy discount points, but the trade-off is a lower interest rate on your loan.
How To Calculate Closing Costs
When it comes to calculating closing costs, the most important thing to be aware of is everything that could go into those costs. With that in mind, we’ll walk you through an example based on a $200,000 loan amount. We’ll get into more detail on what each of these is later on, but for now, there will be a short explanation and a focus on the math.
Before we get there, it should be noted that your loan estimate will list the things you can and cannot shop for. You can typically look around for different providers of title insurance, survey services, homeowners insurance, etc.
Under the first box on the closing cost page are the fees the lender charges to give you the loan, including an origination fee, which is typically around 1% of the loan amount. On our $200,000 loan, this is about $2,000. Some lenders list an origination fee as two separate fees for processing and underwriting. Add them together.
Mortgage points are prepaid interest payments you can make at closing in exchange for a lower rate. One point is equivalent to 1% of the loan amount, but you can get them in increments of as little as 0.125%. The origination fee and any points you pay for will be listed under Origination Charges on your Loan Estimate. You may also see these referred to as discount points.
The typical appraisal fee can be anywhere between $200 – $600 with a typical appraisal fee being around $400 or $500. It’s important to note that this particular cost can vary quite widely because it depends on how many appraisers are available who are qualified to value your home for the loan you’re getting and how far they have to travel.
It’s important to note that an appraisal may be covered in whole or in part as part of your application fee and commitment to work with a lender. If the application fee doesn’t end up covering the whole appraisal, you may pay this partially at closing.
You’ll have a credit monitoring fee that could be around $10. This is something set up so that your lender gets alerts if you have major changes to your credit when you’re going through the mortgage process.
A lender has to get your credit report from all three credit bureaus. The cost of this could be as high as $60 for a merged report. This could also be covered as part of your application fee when your lender pulls your credit.
Your lender may have to make a determination as to whether you need certain types of hazard insurance like flood insurance. The fees for determination and continued monitoring aren’t too high – maybe around $20.
The last cost under the second section of your closing costs is tax service. Because not paying your taxes can cause local authorities to take your property back, there’s a service for monitoring whether your property taxes get paid. This might be $60.
The next section is services that you can shop for. This starts with title search and abstract services. This is to make sure there aren’t any liens or judgments against the property that will cause trouble in the future. An abstract is a description of the property. This might cost around $100.
There may be mail and courier fees associated with the title that is around $50.
If you’re getting a mortgage, you’ll be required to get a lender’s title policy. This protects the lender in the event someone comes along with a legitimate claim to your property in the future. For the sake of our example, let’s say this is $1,500. However, this is another one of those costs that vary heavily geographically.
Notary fees might be around $50. The documents signed at your mortgage closing have to be notarized. Notaries may charge a flat fee for a certain number of documents and then a smaller fee for every document after that.
A settlement or closing fee might be $400. This is the fee to conduct the actual closing itself and finalize the transaction.
If a survey has to be done to determine your property lines and the exact dimensions of your land, you’ll pay at closing. This might be $800, but it heavily depends on the complexity of the survey job.
Finally, the average court record search associated with your title might cost $100. This is about checking for any legal entanglements involving the property.
The next section deals with the fees of your local authorities for record-keeping and property transfer. A mortgage recording fee is typically a flat fee while the transfer tax is a small percentage calculated based on your property value. For the purposes of this example, we’re going to say it’s $400, but it varies quite a bit based on location.
The next section is about prepayments for homeowners insurance and property taxes as well as escrow set up, so a lender might require you to prepay a year of homeowners insurance upfront so as to know you covered along with prepaying a certain number of months of property taxes. This may total $3,200.
You’ll also have to prepay interest due between the time of the due date of your first payment and your closing date. Let’s say that ends up being $300 based on your interest rate.
The last section on closing costs has to do with whether you have an owner’s title policy. While a lender’s title policy protects the lender, an owner’s title policy gives you the money to purchase a new property if you need to move out. One estimate places the cost around $800, but this can vary quite a bit depending on location and provider.
If we take the high end of all estimated ranges for our $200,000 loan amount, the total cost is $10,450 which is roughly 5.23% of the loan amount.
While this is one example of something that might be typical, there are other types of closing costs that may push things higher or lower. On FHA and VA loans, people often pay upfront mortgage insurance programs or funding fees at closing if they aren’t built into the loan.
Meanwhile, things that might lower closing costs are seller concessions, costs paid by the seller as part of negotiations. Closing costs also tend to be lower on refinances because they don’t always require an appraisal to get a home valuation and the title work may be simpler.
The final way to keep closing costs down is to take a lender credit. This is where you negotiate with the lender, possibly taking a slightly higher interest rate in exchange for lower closing costs. You’re spreading the cost over the life of the loan so you don’t have to pay it upfront.