Mortgage closing costs are required to close your loan application. The best way to know how much your closing costs will be is to ask for a good faith estimate (GFE). This is important because the fees and costs may vary depending upon your particular loan scenario and municipality.
Not all closing costs and fees go to the lender. There are third party fees and state and local government fees that must be covered.
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 (GFE).
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. A sizeable 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, most 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 advertises incredibly low rates, its possible they will try to make up the difference with significant lender fees. If a lender advertises little to no fees, then they are most likely making up the difference with a higher rate.
Below you will 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 ($300 – $500) Depending upon the type of property and overall value.
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 - $250).
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 $30
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 - Varies based upon loan amount.
This covers the costs of assuring the lender that you own the home and the lenders mortgage is a valid lien. 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 years insurance is often paid at closing.
Buyers 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.
Lenders Attorney Fee (Not required in all states – $150 – $500)
This fee is paid to the lenders attorney for preparing and reviewing all of the closing documents on behalf of the lender.
State and Local Government Taxes
Many states and local governments will charge taxes when you buy or sell your home or refinance. Taxes and other state and local government fees will vary widely. These costs will depend solely on your location and are not controlled by your lender.
Escrow Deposit for Property Taxes & Mortgage Insurance (Varies widely)
Your lender may require you to make monthly payments into an escrow or impound account for the payment of your taxes and insurance. The lender will use this money to pay your taxes and insurance when the bills are due. You may be required to pay an extra two months worth of payments at closing to make sure the lender will have enough money to pay the bills in the event the bills are higher.
Transfer Taxes (Varies widely by state & municipality)
This is the tax paid when the title passes from seller to buyer. Local custom or your purchase agreement will determine who pays this tax.
Recording Fees (Varies widely depending on municipality)
This is a fee charged by the local recording office for the recording of certain legal documents in the public land records such as your deed or mortgage.
Mortgage Closing Costs — Lender Fees
After the third–party and state/local government fees have been covered, the remaining portion of closing costs goes to the lender.
Processing Fee ($575 – $1000)
This fee covers the lenders cost to process the information on your loan application.
Underwriting Fee ($195 – $795)
This fee is charged to cover the cost of processing and evaluating your loan application, and for researching whether or not to approve you for the loan.
Loan Discount Points (Generally zero to two percent of loan amount)
Loan discount points are prepaid interest. You can choose to pay points to reduce your interest rate (and ultimately, your monthly payment.). One point is 1% of your loan amount.
Pre–Paid Interest (Varies depending on loan amount, interest rate and time of month you close on your loan.)
This is interest you pay at closing in order to get the interest paid up to the first of the month. It varies depending on your interest rate and the day of your closing. For example, if your loan closing is on the fifteenth day of the month, you will pay 15 days worth of interest on your loan to cover the period before the first of the next month.
There are other fees associated with buying a home that are not considered mortgage closing costs, but you should be aware of them. For instance, a home inspection usually costs around $225 – $450 and evaluates the structural and mechanical condition of a property to check for any potential hazards or home repairs that may be needed before closing on your mortgage. We highly recommend having an inspection done; however, it is your decision as a buyer whether or not to have a home inspection as it is not required.
Is There Really A No Closing Cost Loan?
The answer is NO. The closing costs referenced above must get paid somehow. The borrower will have to pay those closing costs in some way. Here are some of those ways...
1. Pay the closing costs at the closing table.
2. Roll the closing costs into the loan balance so there is no out of pocket at closing. However, in this scenario you are financing those costs and paying interest on them over the life of the loan.
3. Accept a higher rate in exchange for the lender paying those closing costs for you. The lender uses the anticipated additional interest dollars earned over the next few years to offset the additional costs they will incur to pay for your closing costs.
Good Faith Estimate (GFE)
The good faith estimate is the method used to communicate the anticipated closing costs from the lender to the borrower. Recently, there have been many regulation changes to be sure the borrowers have full disclosure. In fact, if the actual closing costs differ ( by x%) from the costs referenced on the GFE, the lender may have to absorb those costs.
Some of the articles referenced below will touch on some of the recent news regarding the regulation changes.
If you have any questions regarding closing costs, please contact us to ask and we will do our best to answer those questions for you.
Cut Those Closing Costs - Smartmoney
Save Thousands On Closing Costs - ABC News
How Much Are Closing Costs? - Realtor.com