What Are Mortgage Closing Costs?
When people talk about home buying, they often say, "Don’t forget about closing costs." What the heck are closing costs?
On the day a buyer goes into the lender’s office and signs all the loan and home purchase paperwork, they will also be "signing off" on a list of expenses that are going to be required to make the purchase possible, as well as some future expenses they will be committing to take on in order to become homeowners. Many of these expenses are commonly referred to as the closing costs. They tend to include pretty much the same things no matter who the lender is, but they may be packaged differently, priced differently, and buyers may have different options with various lenders.
For example, one lender may charge for several different services separately (like an appraisal, credit check, and wire transfers) while others bundle them all under the title of loan origination fee. One lender may charge $50 for an application fee; another might charge $125. Some costs, like the property tax amount, will be the same charged by all lenders on the same property. Within three days of receiving an application and other required documents (such as, a credit check) lenders have to give buyers an estimate of what the closing costs will be in order to help buyers decide which lender to choose.
Sometimes home buyers pay the closing costs on the spot the day they take ownership of the home. Others have some of the costs financed into the mortgage. Some lenders offer "no closing cost" mortgages, which essentially means that all the closing costs have been added to the mortgage. That makes closing day easier, but buyers still pay for it, with interest, over the term of the mortgage. Since closing costs can average between 2% and 5% of the transaction, it’s a good idea to know about them ahead of time and know whether to show up ready to write a big check.
Important tip: Sometimes closing costs can be negotiated with certain fees waived. It depends on the lender and the particular fee.
Buyers are generally expected to pay the property taxes due from the date of sale until the end of the tax year. If the seller already paid the year’s taxes, buyers are often expected to reimburse them for the amount after the date of the sale.
Lenders require home buyers to have an insurance policy to protect the home in case of storm, flood, fire, and so forth. If the home is damaged, the lender loses their collateral. Lenders may add the price of the home insurance to the mortgage payment or ask for it as a lump sum at closing.
Buyers may be required by the lender to get the property inspected for problems that have to be fixed before the lender extends the mortgage. Inspectors might evaluate the structural soundness of the home, the health of the mechanical and electrical systems, and a pest or termite inspection. Buyers may pay for these inspections at closing. There may also be the option to pay for the inspection when it is performed, so check with your lender.
Title research and insurance
In Texas, title research and insurance can cost up to about $2,000 for a property valued under $1 million. The home buyer pays for policies both for the lender and for themselves to guarantee that the property title is properly assigned.
Loan application fee
Lenders charge a fee just to get started on a loan application, typically $25- to-$150. This pays them for the work they have to do to start the application process and helps cover the cost of their time in case customers aren’t eligible for a loan or decide not to go forward. If the loan is successful, many lenders may waive this fee.
This costs around $300-to-$500. The lender will hire an appraiser to make sure the home is worth what buyers are paying for it. They don’t want to lend more money than the house is worth. This is part of the cost of creating a mortgage, so lenders pass it on to buyers, though, sometimes they include it under the "umbrella" of a loan origination fee.
Loan origination fee
About 1% of the mortgage. Different lenders include different things in this fee. Like they might say that having a home appraisal was part of originating the loan and include that, or they might put the appraisal in its own separate category. It can also include the cost of a credit check, paying people to notarize documents, and other things they have to do to get all the information collected and organized.
This fee is sometimes tucked under the loan origination fee as well, but it costs between $400 and $900 on its own. If the buyer has good credit and earns enough money to cover the house payment with their other debts, this is often a pretty straightforward process and the price will be on the lower end. But if there are issues, like no credit history or some credit challenges, the underwriter will have to look more in-depth at the buyer’s finances to justify approving the mortgage. This extended process may cost more.
PMI or MIP
These are insurance policies lenders charge when the buyer has less than a 20% down payment. These can either be added to the mortgage payment or paid at closing in a lump sum. How much buyers pay for this insurance policy depends on many factors, such as the size of the loan, the amount of down payment, their credit score, and more. PMI stands for Private Mortgage Insurance and is typically required on non-FHA loans until the homeowner reaches 20% equity in the home. MIP is Mortgage Insurance Premium. MIP is a requirement for the life of an FHA loan, which is why FHA loans are often refinanced after 20% equity is obtained.
There are two kinds of points. One is origination points which is a fee paid to compensate the loan officers; the other is an amount paid to discount the interest rate of the mortgage. Origination points are often the same as origination fees—it’s just a different term for paying for the work the lender did to get the buyer’s mortgage together.
The other kind of points is called discount points. Discount points is money paid upfront to reduce the interest rate, similar to the way the down payment effectively lowers the principal amount of the loan. Many buyers do not pay points at all.
There are other fees sometimes incurred such as legal fees, wire transfer fees, broker fees, court filing fees, and the like. One estimate has all fees in Texas costing around $2,000, but that depends on the particular situation.
It can be difficult to compare apples-to-apples when looking at good faith estimates or loan estimates that use different terminology and have different prices. The important thing is for buyers to work with a lender they trust. Buyers should discuss possibly eliminating or restructuring costs they find daunting, and make sure they understand exactly what they’re paying for. A good lending officer will always walk buyers through the costs. If you’d like more help understanding closing costs, let us know!