Mortgage Closing Costs: A Guide for Homebuyers
Buying a home is one of the greatest investments you’ll make in your lifetime. Aside from the sale price of the home, there are other expenses that many first-time homebuyers tend to overlook, such as moving costs and furnishing your new place. However, one of the most significant and misunderstood figures is mortgage closing costs.
In this article, we’ll break down mortgage closing costs, detail how much you can expect to pay, and provide ways you can save on this expense.
What are Closing Costs?
Purchasing a home is a semi-complex process that involves a multitude of parties. Aside from the seller, buyer, lender, and real estate agents, there are various companies and individuals that will play a role, such as home inspectors, appraisers, attorneys, and more.
Instead of paying each item individually, all these costs are grouped together into one large payment called closing costs. This expense is due upfront when you close on your new home. Because closing costs can be expensive, they, along with a down payment, are the greatest barriers potential buyers face regarding homeownership.
How Much are Closing Costs?
Closing costs will vary based on several factors, including the home’s sale price, your loan details, lender requirements, and the state where the home is located. However, a good rule of thumb is that closing costs will range between 3% and 6% of the home’s sale price.
For example, imagine the home you plan to purchase is $300,000. Your closing costs would be roughly $9,000 to $18,000. Again, closing costs are due upfront at the time of closing on your new property.
A Breakdown of Common Closing Costs:
Closing costs will vary somewhat for each unique buyer. Not all lenders or insurance companies require every item listed; however, it’s wise to familiarize yourself with each category so you have a general understanding of how closing costs are calculated.
- Application Fee: Covers the administrative work necessary to process your mortgage loan application.
- Appraisal: Lenders typically require an appraisal of the property to ensure the home is worth the amount you’re requesting to borrow. This fee covers the cost of a professional appraiser to assess your property and provide your lender with an estimate of your home’s value.
- Attorney Fees: Many states require an attorney to review the closing documents for the agreements to become legally binding. This expense covers the service fee for an attorney to be present at closing.
- Credit Check: Some lenders may charge a fee to obtain a copy of and review your credit report.
- Discount Points: These optional charges may help you qualify for a lower interest rate on your mortgage loan and will vary depending on your lender and the mortgage type you select.
- Escrow Payment: You may be asked to make your initial escrow payment at closing. The amount varies for each transaction, and it covers property taxes and mortgage insurance payments.
- Homeowner’s Insurance: When you take out a mortgage loan, your lender will require you to have homeowner’s insurance to protect the property in the event of damage or loss. Many companies will require you to pay the first year of homeowner’s insurance premiums upfront at closing to ensure you have this protection in place.
- Lender’s Title Insurance: This protects the lender if there is an issue with the title and assures them that you own the home and the lender’s mortgage is valid.
- Origination Fee: Compensates the lender for the borrowing process, including processing and underwriting the loan, and other services associated with the financing process.
- Pest Inspection: Some states require an inspection for termites and other pests. This inspection is also required for some government loans and other mortgage types. Depending on where you live, this service might be included with the Home Inspection.
- Prepaid Interest: Most lenders require buyers to prepay the interest that will accrue from the day of closing until the date of the first mortgage payment, typically due on the 1st of the month. You’ll pay the cost for the period upfront and roll it into your overall closing costs.
- Primary Mortgage Insurance (PMI): PMI protects the lender if you cannot make your mortgage payments. If your down payment is less than 20% of the home’s value, you’ll likely be required to pay PMI premiums in addition to your mortgage payments every month until you've reached 20% equity in the property. Some loans require you to pay an Initial PMI Premium at closing.
- Property Taxes: Depending on what time of year you’re purchasing the home, the seller may have already paid the property taxes for the current year. If the seller has already paid the taxes, you may need to reimburse the seller for a prorated amount that covers the period after you become the owner.
- Title Fees: Covers the cost of a title search wherein your lender hires a title company or real estate attorney to examine public records for legal ownership of the property and to determine whether there are any liens or legal claims against it.
- Transfer Taxes: Covers the tax for transferring the property’s title from the seller to the buyer.
- Underwriting Fee: This fee goes directly to your lender and covers the cost of researching your creditworthiness and verifying your other qualifications to be approved for a loan. It might be included in the Origination Fee section, depending on your specific lender.
Can I Save on Closing Costs?
Closing costs are standard across the board, however, there are a few different avenues you can pursue to potentially lower your expenses:
- Negotiate with the Seller: You can reach out to the seller and ask them to cover a portion of the closing costs. If they are particularly motivated to sell, they may agree to this request.
- Schedule Closing at the End of the Month: As listed above, prepaid interest charges are one component of your closing costs. Scheduling your closing date towards the end of the month minimizes the number of days that you’ll have to prepay.
- Verify All Charges: Compare your initial loan estimate and your final disclosure form. Look for any discrepancies or new charges added. If anything doesn’t look right, bring it to your lender's attention. You may wind up saving yourself from paying extra fees due to an error.
- Compare Lender Fees: Another aspect that influences your total closing expenses is which lender you choose to finance with. Some mortgage lenders charge much higher fees for underwriting and origination than others. As a not-for-profit financial institution, you can rest assured knowing your credit union is not here to nickel and dime you on such a significant milestone in your life.
Are There Loans with No Closing Costs?
Technically, yes, there are loans advertised as “no-closing-costs loans.” However, these loans don’t eliminate closing costs. These expenses still exist, you’ll just end up paying for them differently. Rather than paying for the fees associated with closing upfront, they are rolled into the loan. So, you are still paying for them and effectively increasing your borrowing amount.
Additionally, no-closing-cost loans usually come in exchange for a higher interest rate. While this may save you from having to pay upfront at closing, it ultimately costs you more over the life of the loan. Your lender is absorbing these costs for you in the short term while you end up paying a higher rate to cover them in the long term. Because home loans have much longer terms, the interest you’ll pay on these costs will become substantial.
CAMPUS Can Help!
Buying a home is a significant move, both emotionally and financially. By understanding closing costs and knowing all the expenses included, you’ll have a clearer picture of how much you’ll need to pay to get the keys to your new place.
If you have questions about closing costs or the home-buying process, or you’re ready to become pre-approved for a mortgage, we’re ready to help. Please stop by any of our convenient service center locations or call 800-367-6440 to schedule an appointment with our Real Estate Team.
By CAMPUS USA at 8 Oct 2024, 08:00 AM