Any home loan — whether to buy a new home or to refinance an existing loan — will come with closing expenses. Closing costs include a range of mortgage servicing fees and required deferred products such as homeowners’ insurance and property taxes.
And how much is the closing cost?
Generally speaking, closing costs are on average 1-5 percent of the loan volume. However, closing costs differ based on the size of the loan, the form of mortgage, and the part of the country where you are buying or refinancing.
Below is a list of the most common closing cost definitions and estimated costs in real estate. The condition of each person is different. The easiest way to get an correct estimation of the cost of your loan is to review your mortgage application and receive an itemized closing cost sheet from your lender.
When are you paying closure costs?
At the end of the loan process, you pay the closing costs — when the transaction ends.
One common misconception is that homebuyers must come up with thousands of dollars in upfront and out-of-pocket closing costs. This is not the case.
You don’t pay them separately from your down payment, either. Once you sign the final loan papers, the escrow service measures your closing expenses and applies them to the down payment sum, and then subtracts all lender or seller-paid expenses. That’s the number you’re going to have to turn over to the escrow service. (You usually wire the money or have a cashier’s check with you when you sign the last loan paperwork.)
Table: Closing cost overview
This table shows approximate closing costs on a $250,000 conventional loan in Washington State. Closing costs are based on your type of loan, the amount of the loan and the geographical area; your costs are likely to be different.
|Loan origination fee||$2,500 (1% of loan amount)|
|Discount fee||$625 (0.25%)|
|Homeowners insurance premium (1st year)||$700|
|Property tax reserves (6 months)||$1,500|
|Estimated Total||$7,985 (3.2% of loan amount)|
A home loan is funded either by a private bank, a mortgage company or a non-profit credit union, whether or not it is a government-backed loan. These companies have overhead costs, such as employees and bank branches. A part of your closing costs will therefore be paid to these firms to handle the loan for you. Below are the typical fees that you can expect your lender to charge.
Origination fee (0-1 percent of the loan amount)
The lender’s origination fee is essentially a part of the lender’s compensation for the origination of your loan — in other words, finding you as a customer and working your loan through to completion. This fee can vary considerably depending on the lender, as the lender can make money on the loan in many ways.
For example, one lender may not charge an origination fee, but may give you a higher interest rate. While another lender may charge you no origination fees and give you a low interest rate, but charge high processing and underwriting fees. It is important to look at the full list of closing costs and not just the fee for origination.
Mortgage brokerage fee (0-1 percent of the loan amount)
This fee is the same as the origination fee, which is paid by mortgage brokers. Mortgage brokers are firms that help homebuyers search various lenders for the right price, but don’t lend the money in the end. You will never be paid both a mortgage broker’s fee and an origination fee.
Discount fee (0-2%+ of the loan amount)
Discount rates (or discount points) are premiums charged by the lender to lower the interest rate. This method is also known as “buying down the rate.” Here’s how it works:
- You pay one discount point, which means you pay 1% of the loan value.
- Your loan will reduce the interest rate by a certain percentage point. (Typically, the premium is lowered by 0.25%, but there is no fixed amount. How much the discount point can reduce the rate varies by the lender, the form of debt, and the current mortgage interest rate.)
If you can afford to pay discount points and expect to stay in your home for a long period of time, it’s actually worth the cost. But if you don’t live in your home long enough to break-even with a discount charge, you’ll lose the money.
Usually, it’s not worth paying a discount rate of more than 1%. Many homeowners have mortgages for fewer than seven years, so spending more money to get a cheaper rate typically doesn’t save much time.
Processing fee ($300-$900)
Loan companies employ loan processors who are responsible for collecting all the paperwork needed to close the loan. While the loan officer focuses on the customer-facing side of the business, the processor focuses on the behind-the-scenes work that goes into your loan. Not all companies charge a processing fee, but take that into account when comparing lenders.
Underwriting fee ($300-$900)
The underwriter is the sole decision-maker for approving the loan. This ffee is for the payment of the appropriate workers to review your paperwork and loan application and to determine whether or not to authorize your loan.
Application cost/commitment fee ($100-$350)
Some lenders require an initial, non-refundable deposit to approve the application. It is advised that you do not go to these lenders if you don’t want to risk the money if you change your mind or if you are refused for a mortgage. You’re not going to have problems locating lenders who don’t charge this fee.
Lock-in charge ($100-$300)
It can take a few weeks to review your mortgage application and mortgage interest rates fluctuate regularly. Many firms can lock your billing during the approval process at a fixed price.
Services requested by the lender
There are a range of resources needed to process the loan. The applicant shall receive the payments charged for each of these facilities, which are included in the closing costs.
Credit report fee ($20-$40)
Lenders withhold your credit as you apply for a loan. This is a critical aspect of your loan application, because it gives the lender a peek at your credit background.
Your recorded score would also impact your interest rate. Credit reports are issued by credit companies that bill for the report, hence the cost.
Flood certification ($20)
Every house in the United States is either in a flood zone or not. The decision is based on the FEMA flood database. Lenders need to know whether or not the house is in a flood zone, and if so, whether flood insurance is eligible. Lenders will not accept a borrower that is in a flood zone, but has no particular flood insurance at its fingertips.
Tax service fee ($50)
This fee is paid to the organization that has been contracted to ensure that all tax credits are received on the home. A municipality, like a town or county, will take a home with taxes due in the past. Lenders like to avoid this situation.
Wire transfer premium ($25)
This amount is charged with bank costs involved with transferring loan money. If you use a cashier’s check to pay for your closing fees and down payment, you are not likely to pay this fee.
Courier charge/postage charge ($20-$30)
Sometimes, lenders provide hand-delivered or overnight papers while gathering all the paperwork needed to approve the loan. This fee pays for these costs.
Upfront fees for government-backed loans
Government-backed forms of loans require upfront payment. Upfront payments are not closing costs. Still, they’re turning up on the fee amount you’re getting from the lender, and it’s nice to be aware of that.
Again, the name is misleading — you don’t have to pay for it in cash in advance; it’s bundled into the actual loan number. Conventional loans are not subject to an interest fee. Among some forms of loans, the charge varies as follows:
- USDA loans require a 1.0 percent upfront cost
- FHA loans requiring a 1.75 percent upfront fee
- VA loans requesting an upfront fee anywhere between 1.25 percent to 3.3 percent of the loan sum. The number depends on the previous use of the VA home loan offer, the down payment sum and the military status. Veterans with injuries in the line of duty may be entitled to waive this charge.
Third-party payments are the value of services rendered by certain companies involved with the debt that are not the lender — for example, the insurance firm and the appraiser.
These fees are going to be similar no matter which lender you choose. They are not as relevant as the contrast of shopping lender payments, but you can also look at the fee amounts and inquire about them. Some lenders, for example, deal with more costly titles and escrow firms. But, for refinancing, you can search around for your own title and escrow agent to get the rate down.
Appraisers are qualified home valuation estimators who measure the worth of the home. (The lender uses this interest when assessing the credit rating.) Appraisals typically bill about $500 for their services. Yet plan to spend up to $1,000 if you’re buying a high-value home or a special house.
Pest inspection ($100-$500)
Many places often need a pest inspection, but this is not a rule. Most areas only need one where there is evidence of pest infestation reported in the appraisal report.
Title report/title insurance ($300-$1,500+)
This premium can vary greatly depending on the valuation of the house, the geographic area and the size of the loan. The role of a title firm is to investigate any previous claims to the property and insure that the title is “clear “— which ensures that no one can claim the right to a house. They also provide protection in the event that anything was missed.
There are two forms of title insurance, and to get a mortgage you will require both. The title policy of the lender shall refund the bank holding the loan in the event that the home is lost to the title charge. The owner’s title policy protects the owner of the property.
Who pays for each program is not always the same. In some parts of the country, the seller pays the owner’s title insurance for the buyer, while the purchaser typically covers the lender’s policy. Ask the real estate agent or lender if the seller pays for the owner’s agreement. If not, the cost of your title insurance may double.
For refinancing, you’re not going to pay for the owner’s insurance because it was already owned before you bought the home; you’re going to be responsible for paying the lender’s policy on the new mortgage.
Escrow charge ($300-$700+)
All funds involved in the deal are handled by the escrow service. They guarantee that all sides pay and get paid appropriately. For eg, at closing, the lender wires in the loan funds and the buyer wires down payment and closing costs. The escrow firm then repays all previous home loans, pays third-party service providers, and transfers the leftover funds to the seller. The escrow firm even has to sign and notarize all of the loan papers.
The escrow rate (also known as settlement fee or closing fee) is dependent on the value of the loan and/or sales price, but plan to spend extra for higher priced properties.
Notary fee ($100-$150)
Once you sign the final loan papers at their office, the company will typically not give you an additional fee. However, if you choose to sign somewhere else like your home, they may charge a fee to send a notary (a signer that can notarize documents) to you.
Closing Protection Letter (CPL) ($50)
This charge is only necessary if the escrow firm is not affiliated with the title business and is not common. This is a letter indicating that the title holder is liable if the escrow service does not transfer the funds correctly.
Survey cost ($400+)
Sometimes, property boundaries need to be calculated by the title company. In this case, a survey is required, but it is not necessary.
Attorney fees ($400+)
Some states need an attorney to be involved in the negotiation of a purchase deal and to promote the prompt completion of the deal. If your state needs one, search around for a cheap attorney — it’s just a formality, and there’s no reason to break the bank.
Each county has its own charges to document the transition of ownership of the property.
Recording fee ($20-$250)
This charge is determined by the county where the property is located. The county documents the particulars of the sale and the identification of the new owner for tax purposes each time a home is bought and sold. The registration process always solidifies the legal possession of the land.
Transfer taxes (fee varies)
Some states tax home sales and refinancing — any sale of real estate from one owner or mortgage firm to another. The expense can be substantial. Some places include a percentage of the current value of the loan or the house price.
Prepaid items are the expenses of buying your house that lenders expect you to pay in advance. They aren’t closing costs — you’ve got to pay for these things while you buy a house and it is not tied to the mortgage per se. For starters, lenders receive one year’s homeowners’ insurance payments in order to ensure that the house is protected.
Prepaid closing costs contribute to the cash you’re going to need to close the loan, so it’s important to bear it in mind. And they can quickly add up to a significant sum of money. For eg, if property taxes are $300 and the lender receives a six months’ amount, that’s $1,800 for just one thing.
Don’t forget to take these risks into account as you’re trying to buy.
Homeowners insurance ($400-$1,000+)
Lenders need evidence that your home is covered for as long as you keep a mortgage loan with an appropriate homeowners insurance policy (also known as liability or fire insurance). Usually, the lenders receive at least one year’s payment at the completion of the loan to pay the insurance provider. The size of this charge depends on the value of the home, the level of insurance coverage and the total premium.
Flood insurance ($300-$1,000+)
Flood insurance is needed if your home is in a flood zone as determined by the flood certificate. Like the homeowners’ compensation program, lenders tend to ensure that the premium is paid within the first year after the completion of the loan.
Tax reserves ($500-$5,000+)
Such payments can vary greatly on the basis of property taxes and the time of year the loan ends when the county collects taxes. Some counties, for example, collect property taxes twice a year (often in April and October).
Lenders need to collect enough to pay the next tax installment. Usually, they would collect from three and eight months of taxation and to cover the first installment of the bill.
Bear in mind that you pay taxes only after the home legally belongs to you — the seller is responsible for the taxes until the day the loan expires.
Mortgage insurance ($100-$700+)
Whether you receive a traditional mortgage and not a government-backed loan such as FHA, USDA or VA providing private mortgage insurance (PMI), the insurer must pay at least two months’ worth of premiums.
Prepaid daily interest rates ($100-$2000 +)
You prepay interest on your loan from the day your loan closed at the end of the month. For example, if you close on the 15th of the month, you pay 15 days of interest in advance. If you have your loan funds at the end of the month, this fee would be low. Essentially, if you close at the beginning of the month and you have a large loan sum, then the fee may be high.
Apply to get a closing cost estimate
The cost estimates given above are just — estimates. Each situation is different and often closing costs are dictated by the value of your home, the size of your debt, and where you stay, among others.
The easiest way to get an reliable cost estimate is to apply for an upcoming purchase or refinance loan. Lenders should work on an itemized worksheet of closing costs unique to your case.