Mortgage Closing Costs Explained Part 2
What Do Closing Costs Include?
The closing costs you’ll pay will vary depending on where you’re buying your home, the home itself, and the type of loan you pursue.
Closing costs may include appraisal fees, loan origination fees, discount points, title searches, credit report charges, and more. Here’s a breakdown of common closing costs.
Appraisal: An appraisal will be mandated by the lender to make sure the home is worth the sale price. Most appraisers charge $300 – $500 for their services.
Escrow fees: You may have to pay portions of property taxes and insurance upfront into an escrow account.
Flood certification: If your house is situated on or near a flood plain, your lender may require documentation confirming its status, which involves paying around $15 – $20 for a certification from the Federal Emergency Management Agency (FEMA).
Home inspection: Depending on the square footage and type of inspection, the buyer pays $500 – $1,000 for a home inspection to look for signs of damage and defects. This is non-refundable money, and there’s no guarantee the seller will make repairs or renegotiate the sales price based on the results of the inspection.
Property taxes: At closing, the buyer typically pays the city and county property taxes due from the date of closing through the end of the tax year.
Annual assessments: If you’re buying in a development with a homeowners association (HOA) that requires an annual fee, it may be due upfront at closing.
Title/attorney fees: This includes necessary government filing fees, escrow fees, notary fees, and other expenses related to transferring the deed. The cost of title and attorney fees varies significantly from state to state.
Loan interest: You’ll need to pay interest on the loan prorated from the closing date to the first of the following month.
Lender fees: These cover items ranging from administrative costs to pulling your credit report to wire transfer fees. If a lender boasts unusually low rates, it’s possible they’ll try to make up the difference with additional lender fees, so be sure to compare apples to apples.
Application fee: This is charged by the lender and varies in price, up to $500. The application fee is non-refundable, even if you aren’t approved for the loan.
Assumption fee: If you’re assuming a conventional loan from the seller, you’ll pay an assumption fee set by the lender, typically $800 – $1,000, or in some cases 1% of the loan amount. For FHA loans, the maximum allowed is $500, and for VA loans, the max is $300.
Prepaid interest: This is a daily interest that accrues on the loan between the closing date and the first monthly mortgage payment.
Loan origination fee: These are the fees paid to the lender to obtain a mortgage and are expressed as a percentage of the loan amount. If the loan amount is $100,000 and you see a $1,000 loan origination fee on the paperwork, the lender is charging one mortgage point.
Discount points: Discount points are fees paid directly to the lender by the buyer at closing in exchange for a reduced interest rate. This is also called “buying down the rate.” One point costs 1% of your mortgage amount (or $1,000 for every $100,000).
Title search fee: Paid to the title search company that researched the property’s history to make sure the title (ownership) will be “clear.” Typically, this runs $75 – $100.
Other Insurance-Related Costs
Mortgage insurance application fee: If your down payment is less than 20%, the lender will require private mortgage insurance (PMI). This fee varies by lender.
Upfront mortgage insurance: PMI can be rolled into your monthly payments, but it can also be paid at closing. Paying upfront usually saves money.
FHA, VA, and USDA fees: Fees on FHA, VA, and USDA loans differ from those charged on conventional loans. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% and a monthly fee. VA home loans require an upfront, one-time VA funding fee, determined by the loan amount, the buyer’s service history, and other factors. VA home loan applicants can pay all or part of the fee in cash or roll it into the loan amount to reduce out-of-pocket expenses.
Lender and owner title insurance: Lender policies protect the mortgage lender’s interest. Buyer policies protect the buyer’s interest. The average title insurance policy carries a one-time premium of about $1,000, paid by the buyer.
Closing Costs For Buyers: What’s Negotiable?
The buyer typically pays the majority of closing costs. Of course, there’s always room to negotiate – but choose your battles wisely. A seller will likely be much more open to negotiation when presented with an offer of the full asking price or when it’s a buyer’s market.
Another option for these costs is to meet the seller halfway, dividing expenses between both parties. Sellers traditionally pay for certain things, like the real estate agent commission. Other things, like the owner’s title policy, may be paid for by the seller depending on local custom. Alternatively, you could negotiate seller concessions.
Seller concessions are part of your closing costs that, instead of paying yourself, you negotiate to have the seller pay. Buyers might ask for concessions if they think they’ll have trouble covering their closing costs or if a home inspector finds issues that are going to cost money to fix.
It’s worth noting that concessions can help out the seller as well. If they are selling their home in a crowded market and aren’t having much luck, offering concessions can make the deal seem more attractive to potential buyers.
So, what are buyers on the hook for? While certain costs (such as appraisal fees) tend to be set and nonnegotiable, other items such as title insurance, pest inspection, and the settlement agent may be open to negotiation. Of these fees, you’ll save the most on title insurance and settlement (which are sometimes combined). But if you’re planning to comparison shop for title and settlement, do so quickly because these services take time.
Also, watch for miscellaneous fees like funding and delivery fees. If the fees seem vague, you may be able to push back to have them lowered or eliminated.
Closing Costs: Key Takeaways
We’ve gone over an awful lot regarding closing costs up to this point, so let’s close by giving a quick summary of the key points to remember:
Closing costs are fees related to your home purchase or refinance that are paid when you sign your paperwork.
These are anywhere between 3% – 6% of the loan amount. On a $200,000 loan, that amounts to $6,000 – $12,000.
Closing costs break down into several broad categories including lending costs like loan origination fees, property-related feels like appraisal and title, and fees related to insurance and escrow set up.
Things that sellers might be able to pay for through seller concessions include owner’s title insurance, attorneys’ fees, etc.
You can negotiate with your lender by taking what is known as lender credits. You can take a slightly higher interest rate to pay certain closing costs over the life of the loan rather than having to come up with all the closing costs at the time of settlement.
Closing costs are highly variable depending on the type of loan you’re getting, whether you take any lender credits or seller concessions, and where you live.
Closing costs tend to be a little bit lower on a refinance because sometimes a full appraisal isn’t required and the title work can be easier.
Now that you know more about what to expect in terms of closing costs, if you’re ready to get started, you can apply online.