The true cost of a getting a mortgage is more than just your regular mortgage payments. Throughout the mortgage process, a variety of services take place before you close your loan. We’ll explain the common services and fees involved in getting a mortgage so you know what to expect.
When you buy a home, your down payment is almost always the largest upfront cost. Your down payment is the difference between the purchase price of the home and how much you’re borrowing from a mortgage lender. For example, if you’re buying a $200,000 house and you’re borrowing $190,000, your down payment would be $10,000.
You’ll pay your down payment when you close the loan. In most cases, your down payment must be paid from a bank or investment account. Some loan programs, like an FHA loan, allow you to use gift money toward your down payment.
Different loan types require different down payment amounts. For example, you can pay a down payment as low as 3% to get a conventional loan, while FHA loans require a down payment of 3.5%. Some loan types, like VA and USDA loans, allow you to buy a home without a down payment.
A down payment is only needed when you buy a home, not when you’re refinancing. However, it’s common to pay a lump sum toward your principal when refinancing. This can help you get a better interest rate, remove mortgage insurance or lower your mortgage payment.
Closing costs are the fees for services that occur between when you apply for a loan to when you close the loan. The total cost depends on the lender, loan type and what third-party vendors charge for their services.
How closing costs work depends on if you’re buying a home or refinancing.
- When you buy a home, these costs are due at the closing table to finalize the purchase agreement. Quicken Loans will notify you of the costs 3 days before closing. Closing costs will typically be 2 – 5% of the total loan amount.
- When you refinance your mortgage, your lender may allow you to refinance without paying closing costs upfront. Instead of a lump sum, your closing costs are rolled into your loan and paid as a part of your regular mortgage payments for the life of the loan. Closing costs vary based on the loan type.
Let’s review some examples of closing costs.
Discount Points And Lender Credits
Discount points and lender credits both influence how much you’ll pay in closing costs and interest, but they operate slightly differently.
Discount points are fees that you can pay to get an interest rate. A point is equal to 1% of the total loan amount. The more points you purchase, the lower your interest rate will be and the more money you’ll need to pay at closing.
If you can afford the higher upfront cost, buying discount points can save you thousands in interest over the life of the loan. This could make sense if you plan to stay in your home long-term and you have a high interest rate. Your lender can help you understand when it’s worth it to “buy” a lower rate with discount points or save on closing costs.
You can think of lender credits as being the opposite of discount points. While a discount point allows you to pay a fee to get a lower rate and save on interest, a lender credit allows you to take a higher rate to save on closing costs.
Like discount points, one lender credit is equal to 1% of the total loan amount. When using lender credits, your monthly payments will increase to compensate for not paying the closing costs upfront.
If the interest rate is already low, or your goal is to reduce how much you have to pay upfront, lender credits can help. Saving on closing costs can also free up cash for home repairs and renovations.
Lenders charge fees for processing your loan. Here are some examples of common lender fees.
- An origination fee covers the services a lender provides such as document preparation to help you apply for a mortgage.
- An underwriting fee covers the cost of verifying your information and ensuring you can afford your mortgage payments.
- Credit fees cover the cost of pulling and reviewing your credit report. Lenders use your credit report and credit score to learn if you have a history of paying back your debt.
- A notary fee covers the cost of having a notary as a witness at closing. Notaries are appointed by the government to help prevent fraud. They confirm the identity of the lender and buyer and make sure both parties understand the contract’s requirements.
- An attorney fee may be charged if a lawyer is hired to confirm the legality of closing documents. Not every state requires an attorney to be present at closing.
Lenders usually charge a fee to determine if your home is in an area that would put it at risk for flood damage. If your home is in a flood zone, you will need to pay for flood insurance for the life of the loan.
When you buy a home, a home inspection is a third-party service that assesses the home for any damages or structural concerns. The inspection can include the home’s electric, plumbing, and heating systems. The inspector may also conduct tests for radon detection and examine the home’s foundation and roof.
Your lender may not require a home inspection, and the cost is not included in your closing costs. However, it’s a good idea when you’re buying a home so you aren’t surprised by significant unexpected repairs after closing. Often, you’ll hire a home inspector yourself and pay them directly.
Depending on your loan type, your lender may require some special inspections before you can close the loan. For example, VA loans require a pest inspection to check for termites and wood damage. Check with your lender to see if your loan type requires any special inspections – often, you can find a home inspector that is certified for them and save yourself some time and money.
If you are refinancing, a home inspection is typically not necessary, unless you are refinancing to a loan that requires special inspections, like a VA loan or FHA loan. Your lender will be able to explain what inspections are required and explain how they affect your closing costs.
A home appraisal is an independent, professional opinion on the value of the home. Lenders require a third-party appraisal to avoid lending more than what the home is worth.
When you close the loan, your closing costs will include the appraisal fee. Most appraisals cost between $200 and $600, but they can be more expensive depending on the property type and location.
Once you buy a home, the title or ownership rights of the home must be transferred from the seller to you. Because properties change hands frequently, title companies check property records to make sure no other person has a claim to your home.
The title company may also charge a service fee to identify the property’s boundaries, improvements on the property and any easements that grant specific property access. An example of an easement is shared access to any property between homes like a walkway.
Title companies may also charge a recording fee. This is the cost for making the purchase of your home a public record. Any mortgages or other debts against the property will also be recorded. The fee for the service varies across counties and title companies.
Most lenders, like Quicken Loans, require a lender title policy. This is insurance that protects the lender if there are any disputes about who owns the home while you pay off your mortgage. You can also buy a title policy to protect your ownership rights. However, Quicken Loans does not require you to purchase one.
Earnest Money Deposit
When you sign a purchase agreement, you have to make an earnest money deposit. This money is used to show the seller you’re serious about purchasing the home. Your earnest money deposit can count towards your down payment and closing costs.
Your earnest money deposit may be refundable if the home doesn’t appraise for the listed price, or the inspection reveals major structural issues that were not disclosed by the seller. In all cases, the earnest money deposit is returned to you if the seller terminates the deal.
If you back out of the purchase, or you don’t follow what is outlined in your purchase agreement, you can lose your earnest money deposit.
Prepaids And Escrow
Prepaids are expenses that you pay at closing to cover the gap between when you close the loan and your first scheduled mortgage payment. They typically include property taxes, homeowners insurance, mortgage insurance and interest.
In some cases, your lender may use this money to create an escrow account. Mortgage servicers (the company you pay your mortgage payments to) use an escrow account to set aside money from your mortgage payments to pay for your homeowners insurance and property taxes. This means you only have to worry about making your mortgage payments, and your mortgage servicer will make sure your insurance premiums and taxes are paid on time.
Loan Specific Fees
An FHA loan usually includes a special kind of mortgage insurance called an upfront mortgage insurance premium (UFMIP). It helps insure the loan if the borrower defaults. UFMIP costs 1.75% of the loan amount and can be rolled into the loan balance so you don’t have to pay at closing.
A VA loan includes a funding fee to help cover the cost of the VA Home Loan program. The cost varies depending on the type of military service, the size of your down payment and whether it’s your first time using the loan program.
A USDA loan includes an upfront guarantee fee to help cover the cost of the USDA Home Loan program. The cost of the fee is 1% of the loan amount and can be rolled into the loan balance, so you don’t have to pay at closing.
After you close on your new home, you’ll continue to make monthly mortgage payments until the loan is paid off.
These payments include principal, interest, property taxes and homeowners insurance. You may also have to pay mortgage insurance and homeowners association dues depending on your loan and your home’s property type.
The Bottom Line
You want to understand exactly how much to bring to the closing table. Working with a lender that can explain all the costs can prevent any surprises.
Rocket Mortgage® by Quicken Loans® allows you to review each cost when you apply for a loan so you can close with confidence.
If you still have questions and would like to talk to someone directly, you can speak with a Home Loan Expert by a calling us at (800) 251-9080.