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Mortgage closing costs: what they are and how much you’ll pay

After saving for a down payment, house hunting and applying for a mortgage, closing costs can come as an unpleasant surprise. But they’re an important part of buying a home, and they need to be considered when you’re determining your home-buying budget. Understanding what closing costs cover and knowing how much you’ll pay will smooth out the final stretch of the home-buying process.

What are closing costs?

Closing costs include the myriad fees for the services and expenses required to finalize a mortgage. You’ll have to pay closing costs whether you buy a home or refinance. These fees vary depending on the type of mortgage you have, where you live, and other factors. Most of the closing costs fall on the buyer, but the seller typically has to pay a few, too, such as the real estate agent’s commission.

How much are average closing costs?

Average closing costs for the buyer run between about 2% and 5% of the loan amount, which is why it’s important to take them into consideration when buying a house. That means, on a $300,000 home purchase, you would pay from $6,000 to $15,000 in closing costs.

The most cost-effective way to cover your closing costs is to pay them out-of-pocket as a one-time expense. You may be able to finance them by folding them into the loan, if the lender allows, but then you’ll pay interest on those costs through the life of the mortgage.

Who pays for mortgage closing costs?

Sometimes it’s possible to negotiate for the seller to pay some or all the closing costs as part of the offer process. Whether or not a seller agrees to this usually depends on how much leverage you have as the buyer.

What is included in closing costs?

Broadly speaking, mortgage closing costs fall into three groups: fees from the lender, fees related to the titling of the property, and prepaid costs. Not all of these fees are required; the ones included in your closing costs can vary quite a bit by lender, so be aware. Let’s take a look at what you can expect to see in each of these groups.

Property-related fees

Appraisal fee: It’s important to a lender to know if the property is worth as much as the amount you want to borrow. This is for two reasons: The lender needs to verify the amount you need for a loan is justified and make sure it can recoup the value of the home if you default on your loan. The average cost of a home appraisal by a certified professional appraiser ranges between $300 and $400.

Home inspection: Most lenders require a home inspection, especially if you’re getting a government-backed mortgage, such as an FHA loan insured by the Federal Housing Administration.

Before lending you hundreds of thousands of dollars, the lender needs to make sure the home is structurally sound and in good enough shape to live in. If the inspection turns up troubling results, you may be able to negotiate a lower sale price. But depending on how severe the problems are, you have the option to back out of your contract if you and the seller can’t come to an agreement on how to fix the issues. Home inspection fees, on average, range from $300 to $500.

Loan-related fees

Application fee: This covers the cost of processing your request for a new loan and includes costs such as credit checks and administrative expenses. The application fee varies depending on the lender and the amount of work it takes to process your loan application.

Assumption fee: If the seller has an assumable mortgage and you take over the remaining balance of the loan, you may be charged a variable fee based on the balance.

Attorney’s fees: Some states require a real estate attorney to be present at the closing of a real estate purchase. The fee will vary depending on the number of hours the attorney works for you.

Prepaid interest: Most lenders require buyers to pay the interest that accrues on the mortgage between the date of settlement and the first monthly payment due date, so be prepared to pay that amount at closing; it will depend on your loan size.

Loan origination fee: This is a big one. It’s also known as an underwriting fee, administrative fee or processing fee. The loan origination fee is a charge by the lender for evaluating and preparing your mortgage loan. This can cover document preparation, notary fees and the lender’s attorney fees. Expect to pay about 0.5% of the amount you’re borrowing. A $300,000 loan, for example, would result in a loan origination fee of $1,500.

Points: Most lenders will offer you the option to pay an extra fee that reduces the interest rate on your mortgage. These fees are called points, and each point equals one percent of the home’s purchase price. If you’ve chosen this option, you’ll pay for the points at closing. Paying for points may be helpful if you’re planning on staying in the house for a long time; otherwise, they may not make enough of a difference to be worth it.

Mortgage broker fee: If you work with a mortgage broker to find a loan, the broker will usually charge a commission as a percentage of the loan amount. The commission averages from 0.5% to 2.75% of the home’s purchase price.

Mortgage Title Fees

Title search costs: These costs account for the title company’s search for any competing claims to the property being sold, as well as any liens.

Title insurance: There are two types of title insurance. One protects the lender in the event there are problems with the title (for example, old back taxes, liens from a home equity loan, lost/flawed records, or erroneous surveys) that weren’t discovered during the title search. Basically, it protects the lender from title-related issues that may be expensive to resolve. The cost for this insurance is usually included in closing costs. The second type of title insurance is to protect you, the buyer. It’s optional, but is widely considered to be worth buying. In most cases, this type of title insurance is paid for by the seller of the property.

Recording fees: This is a charge from your city and/or county government to update their records to reflect your ownership of the home. These fees vary by state, and not all states charge for this service.

Closing fees: This fee accounts for the services of the company that handles your actual closing. In many cases, this is a title company, but sometimes it’s an escrow company or attorney.

Mortgage insurance and tax fees

Escrow: Buying a home typically involves establishing what’s known as an escrow account. The funds in this account are used to pay your homeowners insurance and property taxes. The benefit of an escrow account is that it’s funded by your monthly mortgage payment, ensuring that these important bills are always paid, and paid on time. Just keep up with your mortgage payments, and the rest is handled for you.

Insurance and taxes:
When you close on your mortgage, you are usually required to pay 14 months’ worth of homeowners’ insurance premiums, plus anywhere from two to six months’ worth of property taxes. These funds will go into your escrow account. However, if your mortgage doesn’t involve an escrow account, you as the buyer a responsible for directly paying the homeowners insurance premiums and property taxes.

Interest prepayment: Buyers are typically required to prepay the mortgage interest that will accrue between the day of closing and the first mortgage payment.

Association fees: If the property being bought is a condo or part of a homeowners’ association and they have an annual fee, you may be required to pay for up to a full year’s fee upfront.

Title fees

Title search fee: A title search is conducted to ensure that the person selling the house actually owns it and that there are no outstanding claims or liens against the property. This can be fairly labor-intensive, especially if the real estate records aren’t computerized. Title search fees are about $200, but can vary among title companies by region. The search fee may be included in the cost of title insurance.

Lender’s title insurance: Most lenders require what’s called a loan policy; it protects them in case there’s an error in the title search and someone makes a claim of ownership on the property after it’s sold. Coverage lasts until the loan is paid off.

Owner’s title insurance: You should also consider purchasing title insurance to protect yourself in case title problems or claims are made on your home after closing. The owner’s coverage lasts as long as you or your heirs own the property.

This is not a comprehensive list of all possible items included in closing costs, but these are among the most common. Regardless of your specific home-buying situation, it’s always a good idea to stay in close contact with your real estate agent about the potential closing costs you’re likely to incur. And while many closing costs are fixed, others can be negotiated, or you can lower them by shopping around a bit.

It’s also a good idea to closely review the closing disclosure forms that you’ll receive three business days before you sign all the closing paperwork. It shows you all the final closing costs, interest rate and payment. It’s provided three days before closing to give you time to compare it to the loan estimate the lender provided you shortly after submitting your loan application. Don’t be afraid to ask questions about any of the numbers. The more you understand your closing costs, the better off you’ll be.

To learn more about the homebuying process and mortgage options or to apply for pre-approval, schedule a free consultation with our mortgage team or stop by the nearest West Community Credit Union branch.

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