Mortgage closing costs are fees charged for services that must be performed to process and close your loan. At the time you apply for a loan, lenders are required by law to disclose to you, in writing, what the estimated mortgage closing costs will be. This is known as the Good Faith Estimate.
Closing Costs and Fees Associated with Your Home Purchase
Closing costs can vary by mortgage option and amount, so the costs on a 30-year fixed or a 15-year fixed may not be exactly the same as a 5-year ARM mortgage. And some loans, such as an FHA loan or a VA loan actually allow a seller to cover all or some of the closing costs. But what exactly are the closing costs, regardless of whether you or the seller pays them?
The most common closing cost is the down payment. In addition to making your down payment, there are other costs and fees associated with your home purchase. Average closing costs generally range from $2,500 to $5,000 or about 6% of your loan – a sizable amount of money when you consider this is paid upfront at closing. But where exactly does it all go?
A common misconception about mortgage closing costs is that they all go to the lender, when in reality, many of the costs are related to services performed by others. Mortgage closing costs cover expenses associated with getting a home loan, from inspections and appraisals to title insurance, taxes and more. It is important to check your lender fees and closing costs carefully. If a lender boasts incredibly low rates, it’s possible they will try to make up the difference with exorbitant lender fees.
Below you’ll find possible closing costs in an average loan transaction broken down into three groups: third-party fees, state and local government fees, and lender fees.
Mortgage Closing Costs – Third-Party Fees
Many of your mortgage closing costs go to a third-party for services necessary to complete the transaction. Lenders typically have no control over these fees.
- Appraisal ($225 – $450)
The appraisal is required to determine the fair market value of the home. A property appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property. Therefore, an appraiser is needed to make this determination.
- Credit Report ($15 – $30)
When you apply for a mortgage, you have to prove that you are capable of paying it back. Lenders will obtain a copy of your credit report to review your borrowing history and ultimately determine if they should risk lending you money. This fee goes to the credit reporting agency like Experian, TransUnion or Equifax.
- Closing Fee ($150 – $400)
This fee is paid to the title company or attorney for conducting the closing.
- Title Company Title Search or Exam Fee ($150 – $400)
This fee is paid to the title company for doing a detailed search of the property records for your home. The title company will look at prior deeds, court records, property and name indexes, and many other documents. This is to ensure that there are no liens or problems associated with your ownership of the property.
- Survey Fee ($150 – $400)
A survey of the property may be required to verify boundary lines for your property and to ensure that there is no encroachment on the lot.
- Flood Determination/Life of Loan Coverage ($15 – $25)
This cost goes to determining whether or not your property is located in a federally designated flood zone. If the property is found to be located within a flood zone, you will need to buy flood insurance.
- Courier Fee ($30)
This covers the cost of transporting documents to complete the loan transaction as quickly as possible to avoid paying additional interest on your mortgage loan.
- Title Insurance (Lender’s Policy) (Varies – generally between $175 – $875)
This covers the costs of assuring the lender that you own the home and the lender’s mortgage is a valid lien.
- Title Insurance (Owner’s Policy) (Varies – generally between $175 – $875)
This is an insurance policy protecting you in the event someone challenges your ownership of the home.
- Homeowners Insurance (Varies – $300 and up)
Homeowners Insurance is required to cover possible damages to your home. In the event of a fire or other damage, homeowners will receive this insurance to cover the costs of rebuilding. Your first year’s insurance is often paid at closing.
- Buyer’s Attorney Fee (Not required in all states – $400 and up)
This fee is paid to the attorney who prepares and reviews all of the closing documents on your behalf.
- Lender’s Attorney Fee (Not required in all states – $150 – $500)
This fee is paid to the lender’s attorney for preparing and reviewing all of the closing documents on behalf of the lender.