Mortgage Closing Costs Explained

Dated: October 31 2020

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Whether you are buying a home or are refinancing, there are fees required to finalize the loan. We lump all these together and call them closing costs. With refinance loans, the closing costs are a bit less because certain elements are missing (such as title fees, home appraisal fees, and other sale-related fees).

This article will focus on the closing costs that you can expect to pay when you buy a property. 

How much can you expect to pay in closing costs? 

Closing costs are about 2% to 5% of your loan amount. So if your loan is for $250k, you can expect to pay about $5,000 and $12,500 in closing costs. Admittedly, this is a fairly large range but we’ll break down the costs so you can have a better understanding of why it varies so much. 

Property-Related Closing Costs

Home Inspection: Required with FHA loans and by most lenders, a home inspection makes sure that the home is in an adequate living condition and that there are no significant structural problems with the property.

Home inspection fees range from about $300 to $500.

Appraisal: A home inspection ensures the lender that the home value and amount you are asking to borrow matches. In over words, the house has to be worth the amount you’re asking for. If it doesn’t, then its a bad deal and the loan will not get approved. You can expect to pay a certified professional between $300 and $400 for a home inspection.

Loan-Related Closing Costs:

Application fee: This is the processing fee for the loan application and covers administrative expenses, including credit checks. It varies, depending on the amount of work it took to process your application.

Assumption fee: If the seller has an assumable home mortgage and you take over the remaining balance, you may be charged a fee based on the current balance. 

Prepaid interest: Most lenders require payment on the interest that accrues on the loan between the date of settlement and the first payment due date.

Loan origination fee: Also known as an underwriting fee or processing fee. The loan origination fee is charged by the lender for evaluating and preparing your mortgage loan. This can include notary fees and attorney fees. It’ll be about 0.5% of the loan amount. 

Attorney’s fees: This is separate from the potential attorney fee in the loan origination and not always required. Certain states require an attorney to be present at the time of closing when the final docs are being signed. This fee varies depending on the number of hours the attorney was needed. 

Discount points: Discount points reduce the interest rate you would pay over the life of the loan. The cost of one point is equal to 1% of the loan amount. For example, a loan of $350,000 would be a $3,500 payment. This is an optional fee. 

Mortgage Pro Commission: If a mortgage professional assisted with the loan, the broker will likely charge a commission for their service. The commission usually comes as a percentage of the loan and varies as to the amount. 

Mortgage insurance fees

Mortgage insurance application fee: If your down payment is less than 20%, you’ll probably have to pay private mortgage insurance. PMI ensures that the lender will recoup the money they loaned you in case you default. The application fee for PMI varies.

Upfront mortgage insurance: Some lenders also require payment for first year’s mortgage insurance premium. Still, others ask for a lump-sum that covers the life of the loan. It’ll be about 0.55% to 2.25% of the purchase price for mortgage insurance, according to Genworth, Ginnie Mae, and the Urban Institute.

Property taxes, Association fees, and Insurance

Property taxes: Buyers typically pay two months’ worth of city and county property taxes at closing.

Association Fees: You might have to pay annual association fees upfront in one lump sum.

Homeowners insurance premium: You might be required to purchase homeowner’s insurance before settlement to cover the property in case of vandalism and damage 

Title fees

Title search fee: A title search ensures that the seller actually owns the house and that there are no outstanding liens against the property. This can take quite a bit of work and costs about $200.

Whether the buyer or seller pays for title insurance varies by region. A discount is sometimes offered when both the lender’s and owner’s policies are

This is not an exhaustive list of all the possible fees associated with your home loan. It may seem like a lot, but remember that what you gain as a homeowner is a lot more.

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