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Mortgage closing costs are fees charged by the lender, to you, for services that must be performed in order to close your loan. You might be curious about how they’re determined and what’s included, so let’s go over what you can expect on a typical mortgage transaction when you buy or refinance a home.
Over the course of your loan approval process, lenders are federally mandated to give you the TILA-RESPA Integrated Disclosures (TRID), which are essentially two forms — the loan estimate and the closing disclosure. But let’s start from the beginning.
How Much are Closing Costs?
If you’re buying a home, your mortgage down payment isn’t the only check you’ll be writing on the day you close your loan. While paying closing costs is a standard step in the journey to homeownership, buyers might be surprised by the list of expenses. While the total fee amount can change throughout the loan process, you can expect to pay 2% – 5% of your home’s purchase price in closing costs, according to SmartAsset.com. To avoid surprises, read our breakdown of common closing fees below and follow our tips to budget for a great closing day experience.
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 the same as a 5-year adjustable rate (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 – $5,000, which is 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 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’s 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 additional lender fees, so be sure to compare apples to apples. Check out this video for an understanding of the difference between mortgage rates and APR.
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. Below you’ll find possible closing cost items involved in an average loan transaction:
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
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 agencies like Experian, TransUnion or Equifax. While a credit report will cost you around $15 – $30, some lenders receive a discounted rate with credit report agencies and will cover this cost themselves.
- Closing Fee
This fee is paid to the title company or attorney for conducting the closing.
- Title Company Title Search or Exam Fee
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
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
This cost goes to determining whether 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
Not all lenders charge this fee, but if you do see this listed, it 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)
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)
This is an insurance policy protecting you in the event someone challenges your ownership of the home.
- Homeowners Insurance
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)
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)
This fee is paid to the lender’s attorney for preparing and reviewing all of the closing documents on behalf of the lender.
Paying Your Closing Costs
Walk confidently into your closing day by carefully planning your budget and reviewing options to reduce your closing costs. You can get an estimate by using the SmartAsset closing costs calculator based on the amount of your mortgage.
Examine Each Fee
When you do receive your loan estimate, take the time to carefully review each fee with your lender, advises Forbes.com. You may be able to negotiate some fees, requesting that the lender cover some costs. If you shop around, you can ask your lender to match the closing costs offered somewhere else.
Negotiate with the Seller
You can actually reduce the amount you pay at closing by requesting the seller to cover closing fees. One way is to offer the full purchase price on the home with the stipulation that the seller pays the costs associated with closing. Most sellers expect homebuyers to offer less than the listing price on their home. A seller will be much more open to negotiate when facing an offer of the full asking price. Another option is to meet the seller halfway, dividing the closing costs between both parties.
Skip the Points
Essentially pre-paid interest, one point is the equivalent of 1% of the total cost of the loan. Mortgage lenders offer discount points to lower the interest rate on the loan. But in a low-interest rate climate, you may opt to pay less at closing by passing on the points.
Waive the Appraisal
If you are refinancing, you may be able to cut the appraisal fee if your home has been appraised recently. If this is the case, ask your lender for an appraisal waiver. You can also save on your title insurance by asking for a cheaper rate when you refinance.
Roll Closing Costs into Your Mortgage
When refinancing, have you heard of the mythical no-closing cost mortgage? It’s real, but don’t be fooled. Not paying costs at closing may cost you more in the long run. Typically, you can skip paying fees at closing by rolling the costs into the price of your mortgage if you have enough equity or by paying a higher interest rate on your loan. SmartAsset.com recommends reducing the price you pay overall by paying your closing costs up front.
Questions? Contact a Home Loan Expert today or give us a call at (800) 785-4788.
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