{"id":24603,"date":"2021-06-18T09:53:44","date_gmt":"2021-06-18T16:53:44","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=24603"},"modified":"2024-06-03T14:16:54","modified_gmt":"2024-06-03T21:16:54","slug":"buyer-mortgage-loan-costs","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-mortgage-loan-costs\/","title":{"rendered":"Count the Closing Costs: A Line-By-Line Guide to Mortgage Loan Closing Costs"},"content":{"rendered":"

During the excitement of searching for a home and getting preapproved for a loan<\/a>, closing costs may get overlooked. Many buyers tend to budget for their monthly mortgage payment and their down payment<\/a>, but closing costs need to be considered in the equation as well.<\/p>\n

Can you still afford the home of your dreams when you account for closing costs? We\u2019re going to find out.<\/p>\n

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<\/a> Source: (S O C I A L . C U T \/ Unsplash)<\/figcaption><\/figure>\n

What are closing costs<\/a>?<\/h2>\n

Closing costs are a collection of fees related to buying a house, which are due on the official date of purchase (also known as closing). Some of these costs, such as property taxes and insurance, are related to homeownership in general. Others, such as origination fees and interest, are directly related to obtaining a mortgage.<\/p>\n

Richie Helali, a licensed, senior mortgage advisor at HomeLight, says that closing costs are most often paid in cash through wire transfer or certified check, along with the down payment for your loan (which is not part of your closing costs, but is due at the same time). If the total amount of your closing costs plus your down payment is financially overwhelming, sometimes lenders will allow you to add the closing costs into the total amount of your loan, thus reducing the amount of cash needed at closing.<\/p>\n

How much are typical closing costs?<\/h2>\n

Closing costs are typically between 2% and 5% of the loan amount but can vary significantly based on location. ClosingCorp, a national closing data provider, reports that on average, Americans pay $5,749 in closing costs.<\/p>\n

By way of example, consider the possible range in closing costs for these home prices.<\/p>\n\n\n\n\n\n\n\n\n\n
Home price<\/td>\n2% closing costs<\/td>\n5% closing costs<\/td>\n<\/tr>\n
$100,000<\/td>\n$2,000<\/td>\n$5,000<\/td>\n<\/tr>\n
$200,000<\/td>\n$4,000<\/td>\n$10,000<\/td>\n<\/tr>\n
$300,000<\/td>\n$6,000<\/td>\n$15,000<\/td>\n<\/tr>\n
$500,000<\/td>\n$10,000<\/td>\n$25,000<\/td>\n<\/tr>\n
$750,000<\/td>\n$15,000<\/td>\n$37,500<\/td>\n<\/tr>\n
$1,000,000<\/td>\n$20,000<\/td>\n$50,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

The HomeLight closing cost calculator<\/a> can provide a more accurate picture of how this relates to the homes in your price range and location.<\/p>\n

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<\/a> Source: (Tony Stock \/ Unsplash)<\/figcaption><\/figure>\n

Closing costs: a breakdown<\/h2>\n

Closing costs can be broken up into three main categories: loan costs, title costs, and other costs.<\/p>\n

Below, we\u2019ll look at what to expect \u2013\u2013 and where you might be able to save money \u2013\u2013 for each line item. After you understand this breakdown, consult our closing cost calculator<\/a> for a more personalized and pinpointed estimate.<\/p>\n

Mortgage loan costs<\/h3>\n

Mortgage loan costs, broadly referred to as \u201cloan origination fees\u201d, are fees incurred in the creation of the loan and charged by your lender. Generally, mortgage fees<\/a> won\u2019t exceed 3% of the total loan amount.<\/p>\n

Lenders can choose to not<\/i> charge lender fees, but there are a few costs \u2014\u00a0such as the appraisal \u2014 that you\u2019ll likely have to pay no matter what. Here\u2019s a breakdown.<\/p>\n

Origination fees<\/h4>\n

Different lenders will call these \u201corigination fees\u201d by different names. You may see a \u201cprocessing fee\u201d, an \u201cunderwriting fee\u201d, or a \u201clender fee\u201d to name a few. These fees are sometimes charged standalone, sometimes in combination with other such fees. Regardless of what they are called, these fees generally cover the administration of the loan, from processing the application to verifying background information to producing the documentation.<\/p>\n

The amount of these fees can vary significantly from lender to lender, some charge a flat fee, some a percentage of the loan amount, but what they are called and the actual amount can vary greatly. On a Closing Disclosure<\/a>, you\u2019ll see all origination fees, regardless of what they are called, listed on page 2, section A, under \u201cOrigination Charges.\u201d<\/p>\n

Is it possible to save money on this closing cost line item?\u00a0<\/b>
\nYes. When shopping around for a mortgage loan, borrowers should compare origination fees. The variance between different lenders\u2019 origination fees can save thousands of dollars at closing.<\/p>\n

Application fee<\/h4>\n

An application fee is a one-time fee intended to cover the costs of processing the loan application. It is also considered an \u201corigination fee\u201d and will be included in the total origination fees listed on your Loan Estimate and Closing Disclosure.<\/p>\n

An application fee is usually nonrefundable, and the amount will usually vary between $0 and $500, depending on the lender. Online lenders may have the lowest application fees, thanks to labor-saving automation within the application form. Sometimes the application fee is charged upfront (when you apply), and other times, it\u2019s part of the closing costs.<\/p>\n

Is it possible to save money on this closing cost line item?\u00a0<\/b>
\nYes. Borrowers should compare different lenders\u2019 application fees prior to applying for a loan. Not all lenders charge an application fee and the amount charged can vary.<\/p>\n

Mortgage broker fee<\/h4>\n

Mortgage brokers<\/a> are loan originators that work with a network of lenders to connect borrowers with the loan products that are best-suited to their situation. Typically mortgage brokers receive between 1% and 2% of the loan amount in fees.<\/p>\n

Sometimes the lender will cover this cost (or, more accurately, they will probably build it into your rate), and in some instances the broker may be paid directly by you. Buyers should always ask how the broker will be getting paid. Will the lender or the buyer cover the broker\u2019s fee? And if the lender covers the fee, how will that fee be covered?<\/p>\n

A mortgage broker fee is considered an \u201corigination fee\u201d as well, and will be included on your Loan Estimate and Closing Disclosure in that \u201cOrigination Charges\u201d category.\u00a0 The total origination charges paid by you, including any amounts paid to the lender, to a broker, or both, will generally not exceed 3% of the loan amount for the majority of loans. (Smaller balance loans may see fees up to 5%).<\/p>\n

Is it possible to save money on this closing cost line item?\u00a0<\/b>
\nYes. Working with a mortgage broker is optional, and buyers should consider the pros and cons<\/a> before using a broker\u2019s services.<\/p>\n

Credit report fee<\/h4>\n

This fee covers the cost to pull your credit report from the three main reporting bureaus: Equifax, Experian, and TransUnion.<\/p>\n

Credit report fees may range from between $0 and $35; fees on the lower end of that range are more normal, due to lenders having discounted rates with the reporting bureaus.<\/p>\n

Is it possible to save money on this closing cost line item?\u00a0<\/b>
\nMaybe. Your lender will definitely need to pull your credit report, but not all lenders will pass that cost on to you.\u00a0 Your credit report fee will be listed on your loan estimate if you will be charged for it and with that you can make comparisons from lender to lender.<\/p>\n

Discount points<\/h4>\n

Mortgage discount points are an optional lump sum paid at closing in exchange for a lower mortgage interest<\/a> rate, and thus a lower monthly payment.<\/p>\n

Normally, a discount point is the equivalent of 1% of the loan amount (not the total home price) and that amount will usually reduce the interest rate by 0.25%. Discount points are basically prepaid mortgage interest, and are thus tax deductible. See our mortgage points guide<\/a> for more detailed information.
\n<\/b><\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nYes. Points are usually optional, so the total here could be zero. You\u2019ll want to discuss whether discount points make sense for you with your lender. While a lower rate may seem attractive, paying the additional cash out-of-pocket in increased closing costs may not be the best for your situation, particularly if you aren\u2019t planning on staying in the home for very long or are likely to refinance within the first few years.<\/p>\n

Your licensed loan originator should be able to help you work the numbers to find out what\u2019s right for you! And while the percentage quoted above is a regular standard, some lenders may allow you to negotiate.<\/p>\n

Appraisal fee<\/h4>\n

Your lender will require an appraisal in order to be sure that the value of the property meets or exceeds the purchase price. An appraisal typically costs between $300 and $500<\/a>.<\/p>\n

In many instances, the lender handles everything regarding the appraisal, from choosing the company to paying the bill, though sometimes lenders require the buyer to pay for the appraisal upfront. If that\u2019s not the case, you\u2019ll usually pay this fee at closing.<\/p>\n

Is it possible to save money on this closing cost line item?\u00a0<\/b>
\nMaybe. Some lenders may not pass the appraisal fee on to you, but most will.<\/p>\n

Flood certification fee<\/h4>\n

This fee goes to a third-party certification company that looks at government-produced flood maps to determine whether your property is at risk of flooding.<\/a> Depending on the findings, your lender may require you to purchase flood insurance, which would require a FEMA Flood Elevation Certificate<\/a>.<\/p>\n

You may also be subject to a flood monitoring fee, which accounts for any updates or changes in your property\u2019s flood status. Flood certification fees usually run around $20; flood monitoring fees run around $40<\/a>; flood elevation certificates (if needed) cost between $170 and $2,000<\/a>.<\/p>\n

Is it possible to save money on this closing cost line item?\u00a0<\/b>
\nThe certification and monitoring fees are pretty standard and necessary \u2013\u2013 and thankfully not too costly, since you won\u2019t be able to negotiate on these.<\/p>\n

Mortgage insurance<\/h4>\n

Mortgage insurance (MI) or private mortgage insurance<\/a> (PMI) may be required by your lender if you make a down payment that is less than 20% of the purchase price (for conventional loans) or in some cases if you have a government-backed loan (FHA or USDA). Mortgage insurance protects the lender in the event that the homebuyer fails to make payments on the loan.<\/p>\n

Conventional loan borrowers may not see a significant sum of mortgage insurance due at closing. If mortgage insurance is necessary, it\u2019s usually rolled into the monthly payment.<\/p>\n

Borrowers with government-backed FHA loans may need to pay up to 1.75% of the loan cost at closing<\/a> for mortgage insurance, in addition to the mortgage insurance that\u2019s built into their monthly payments. In some cases, lenders will allow borrowers to roll the upfront fee into their mortgage balance, though that option will increase the loan amount and overall costs<\/a>.<\/p>\n

Is it possible to save money on this closing cost line item?\u00a0<\/b>
\nYou\u2019re unlikely to get a break on mortgage insurance. If mortgage insurance is making your closing costs too overwhelming, talk with your lender about rolling the upfront costs into your loan.<\/p>\n

Prepaid mortgage interest<\/h4>\n

This closing fee represents the daily interest due from the date of closing to the date of your first scheduled mortgage payment. Usually, mortgage payments are due<\/a> on the first of the month, so prepaid mortgage interest accounts for the interest due on the days between closing and the first of the month.
\n<\/b><\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nMaybe, if you can control the closing date.<\/p>\n

Helali says, \u201cThe earlier in the month somebody ends up closing, the more expensive that prepaid interest is going to be.\u201d Therefore if you want to save on prepaid interest, it\u2019s in your best interest to ask for a closing date near the end of the month, if you can.<\/p>\n

VA funding fee<\/h4>\n

To offset the cost of administration, VA loan borrowers must pay a fee at closing. This fee ranges in cost, depending on your down payment. Borrowers can expect the fee to be between 1.4% and 3.6% of loan amount.<\/p>\n

Certain classifications of service personnel are exempt from the funding fee. The VA provides a detailed chart<\/a> for more information on this fee due at closing.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nYes, if you\u2019re willing to make a larger down payment. Talk with your lender about your specific situation.<\/p>\n

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<\/a> Source: (Adam Birkett \/ Unsplash)<\/figcaption><\/figure>\n

Title costs<\/h3>\n

Processing the title<\/a> for your home also brings with it certain fees.<\/p>\n

Title search<\/h4>\n

A title company will search for any liens or claims on the property. Their search ensures that the seller truly has the right to sell the home to you, and that when you purchase the home, the title will be yours, \u201cfree and clear.\u201d Title searches usually cost around $200.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nYes. As a buyer, you generally can choose the title company, so feel free to shop around for the lowest title search fees. Your real estate agent<\/a> can give you recommendations.\u00a0 In some locations it may be local custom for the seller to pick the closing agent, but you can request a different title insurer if you wish.<\/p>\n

Title settlement fee<\/h4>\n

The settlement fee covers the administrative duties that surround the closing, including deed creation, wire transfer coordination, government filing work, document preparation, and more.<\/p>\n

This fee may also be listed as simply the \u201cclosing fee\u201d and may cost between $295 and $1,595.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nYes. In many places the buyer gets to choose the closing or settlement agent (often referred to as \u201ctitle\u201d or \u201cescrow\u201d agent, and with that,\u00a0 this is another fee you can ask about upfront.\u00a0 You may have less flexibility, however, if you are buying in a place where the closing agent is traditionally chosen by the seller.<\/p>\n

Title insurance policy: Lender<\/h4>\n

This insurance policy protects the lender if a dispute in ownership may arise. It may run anywhere between $500 and $2,600, depending upon your location, the insurance carrier, and the price of the home.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nMaybe. Ask your title agent about any available options in your title insurance carrier.<\/p>\n

Title insurance policy: Homeowner<\/h4>\n

This policy is the one that protects you <\/i>in the same way that the policy above protects the lender. The costs are usually identical on the closing statement.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nMaybe. As with the lender\u2019s policy above, you\u2019ll want to discuss options with your title agent.<\/p>\n

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<\/a> Source: (Fevziie \/ Shutterstock)<\/figcaption><\/figure>\n

Other costs<\/h3>\n

There are various other costs that may or may not be incurred at closing.<\/p>\n

These costs are fairly standard, regardless of whether or not the buyer has a mortgage loan. But buyers who obtain a mortgage may be required<\/i> to pay some of these costs, whereas cash buyers may opt out of them.<\/p>\n

Home inspection<\/h4>\n

Home inspections<\/a> are an important part of the due diligence<\/a> process in which the property is carefully looked over by a professional. Home inspection costs<\/a> range between $300 and $500, but if you paid the inspector directly, you won\u2019t see this on your closing statement.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nYes. Buyers can usually choose their own home inspector, so you can shop around for the best rates.<\/p>\n

Pest inspection<\/h4>\n

A pest inspector examines the house for termite damage, dry rot, and any evidence of pests. The cost is usually around $100, and this inspection may be required by certain lenders or for government-backed loans.<\/p>\n

Your home inspector may or may not be able to conduct a pest inspection for an additional fee. If you pay the inspector directly, you won\u2019t see this fee at closing.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nYes \u2014 although you probably won\u2019t save much. The overall average for pest inspections is $100, but the typical range is between $75 and $125 for home purchases<\/a>.<\/p>\n

Survey fee<\/h4>\n

Lenders may require surveys in order to verify the boundaries and lot lines of a property, particularly on large or rural parcels.<\/p>\n

Surveys<\/a> generally run between $300 and $800 depending upon the location and terrain difficulty of the property. They\u2019re usually ordered by the lender, and therefore they will often be a part of the closing statement.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nMaybe. Usually the lender will take care of ordering the survey, and most surveyors in your area will have similar standard costs. But if you want to shop around for survey services, ask your lender if that\u2019s a possibility in your situation.<\/p>\n

Transfer taxes<\/h4>\n

Transfer taxes<\/a> \u2013\u2013 a tax realized when a property changes ownership \u2013\u2013 may be imposed by your city, state, or municipality.<\/p>\n

The amount varies greatly depending upon your locale. In some areas, the seller pays the transfer tax.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nNo. If transfer tax is required in your area, there\u2019s nothing you can do about it (though you can always try to negotiate closing credit with the seller). But your loan officer should be able to give you an estimate of the cost upfront.<\/p>\n

Attorney fee<\/h4>\n

An attorney fee may be paid to a lawyer who assists with the legal aspects of closing. Some states require an attorney at closing<\/a>, while others do not. If an attorney is not required in your state, ask your real estate agent if they recommend hiring one in your situation.<\/p>\n

Attorneys typically charge between $150 and $300 per hour, or a flat fee of anywhere between $950 and $5,000. If an attorney is involved, you may see lower fees in the \u201ctitle costs\u201d section, because some of the title agent duties will be handled by the attorney.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nYes. If you need or want an attorney involved in your home purchase, you should absolutely shop around and get recommendations \u2014 while also making sure that the attorney has proper experience and expertise in real estate closings.<\/p>\n

Flood insurance<\/h4>\n

Flood insurance may be required by your lender, depending on the findings of the flood certification. Flood insurance varies by state, but on average, it costs $699 per year.
\n<\/b><\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nNot really. There are only about 60 flood insurance carriers nationwide, and all of them are backed by FEMA\u2019s National Flood Insurance Program<\/a>.<\/p>\n

The premium amount is pre-determined by the flood elevation and certification data. You can ask your insurance agent about possible options, but most likely you won\u2019t see any change in premium price.<\/p>\n

Prepaid property taxes<\/h4>\n

Property taxes are prorated for the actual number of days in the tax year (or period) that you will own the home. Some local governments charge tax for the previous year, and some charge for the year to come.<\/p>\n

Your title agent will look at when the last tax bill was paid by the seller and what time period that tax applied to. If the seller paid tax for a time period that overlaps with when you will own the home, then you must pay the seller back for that portion of the tax.<\/p>\n

For example, let\u2019s say the seller paid their property tax on January 1 for the upcoming year. You purchase the home on July 1, halfway through the year. You\u2019ll need to pay the seller back for half of their property tax because you\u2019ll own the home for half of the year. The title agent will literally count the days of ownership to ensure that the tax is distributed fairly based on ownership time.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nNo. Your portion of property taxes cannot be changed, but you should always verify the amount. If you need assistance, ask your real estate agent.<\/p>\n

Homeowner\u2019s insurance premium<\/h4>\n

Your first annual homeowner\u2019s insurance<\/a> premium will usually be required by your lender at closing.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nYes. You should definitely compare several homeowner\u2019s insurance quotes<\/a> to make sure you\u2019re getting the best rates and coverage.<\/p>\n

Recording<\/h4>\n

This administrative fee goes to your local government office \u2013\u2013 usually the county clerk. The fee covers the processing of public ownership records; it usually runs around $125, but can be higher depending on where you live.<\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nNo. It is what it is!<\/p>\n

Prepaid HOA fee<\/h4>\n

If the home you\u2019re purchasing is part of a homeowners association (HOA)<\/a>, you\u2019ll probably have to pay a portion of the dues at closing (either prorated to the seller or in full for the next year).<\/p>\n

You may also be subject to a one-time HOA transfer fee. Your purchase contract and the HOA bylaws should outline all of this for you prior to closing.
\n<\/b><\/p>\n

Is it possible to save money on this closing cost line item?<\/b>
\nNo. But be sure to ask for all HOA documents during your due diligence period so you\u2019re not surprised by the costs at closing.<\/p>\n

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<\/a> Source: (DocuSign \/ Unsplash)<\/figcaption><\/figure>\n

How do you find out about your closing costs?<\/h2>\n

Your lender will provide a Loan Estimate<\/a> no later than three days after you complete your mortgage application (which generally happens after you have identified a specific property). This document will give you a good idea of what to expect when it comes to closing costs, but it\u2019s not going to be exact.<\/p>\n

Three days prior to closing, the lender will provide a Closing Disclosure form that reflects the exact amount you\u2019ll need to bring to the table for closing costs.<\/p>\n

Helali says, \u201cBetween the time that someone gets their Loan Estimate to the Closing Disclosure, some fees can change. However, there are some fees that cannot change.\u201d<\/p>\n

He details it this way:<\/p>\n

The fees associated with the lender \u2014 those loan origination fees we discussed earlier \u2014 cannot change. A lender cannot suddenly decide their origination fee is $1,000 when the Loan Estimate said it was $0.<\/p>\n

The fees associated with some third parties (such as an appraiser) can only go down. If the Loan Estimate says $500 for an appraisal, your closing statement will reflect the actual appraisal amount up to $500 \u2013\u2013 if the appraiser charges more than $500, the lender has to absorb the difference unless the reason for the additional expense is based on a change you requested (e.g. you decided to make an offer on a different house or chose a different loan program that requires an additional appraisal).<\/p>\n

Some fees associated with the title agent can change within a variance of 10% or an unlimited amount if it is a settlement agent you chose. The lender will\u00a0 do their best to estimate the title costs on the Loan Estimate, but when it comes down to the Closing Disclosure, some fees may be just slightly higher in this section.\u00a0 If the fees change due to the confirmation of your chosen settlement agent, the lender should issue you a revised Loan Estimate to confirm these changes.<\/p>\n

Things like prorated taxes and prepaid interest may change because they will reflect the reality of the closing date. And of course, insurance premiums may change from the Loan Estimate because you<\/i> choose the actual insurance company.<\/p>\n

Helali says it\u2019s important to discuss your Loan Estimate with your loan officer so you can prepare properly for closing.<\/p>\n

\u201cAsk your loan officer, \u2018What can change for the better? What can change for the worse?\u2019 And always prepare for the worst.\u201d<\/p><\/blockquote>\n

Seven tips to reduce your closing costs<\/h2>\n