Mortgage closing costs are the charges or fees paid to cover services used to buy a house using a home loan. Legally, lenders must declare all closing costs in a “good faith estimate” within three days of a home loan application. This is helpful because closing costs can be a surprising cost running into thousands of dollars for the buyer.
What are closing costs for buyers? The lender will list all mortgage closing costs in the ‘loan estimate standard form’. This estimate guides a buyer on what the fixed and negotiable closing costs items are. Keep reading for more information on what do mortgage closing costs cover.
How Does Closing Cost Work?
‘Do closing costs work?’ is an important question because knowing the answer makes buying your new home a smooth process. For simplicity, most lenders will put all smaller charges together into a single one called an ‘origination fee’. It is one of the biggest mortgage closing costs and can be a very high figure.
But buyers should remember that lender charges are negotiable. So one can get lower rates than those listed. The loan estimate standard form indicates all the negotiable items.
What Do Mortgage Closing Costs Cover?
The range of items closing costs covers includes loan origination fees, discount points, appraisal fees, title searches, title insurance, mortgage insurance, homeowners insurance, survey fees, property taxes, deed recording fees, credit check report charges, ownership transfer fees, and real estate agent’s commissions.
Mortgage closing costs vary but typically range from about 2-5% of the home price. Medium to high-priced homes generally charge lower percentages. An example is 2019’s average mortgage price of $315,000, having an approximate closing cost of $6,300 which gives 2%. Comparing prices from a few lenders will help identify the best-priced mortgage provider for lower closing costs.
Apart from the selling price of the home and the lender’s fee, the wide variation in mortgage closing costs comes from the location of the home and the buyer’s ability to negotiate prices. A home situated in a disaster-prone area may need extra insurance.
Again, mortgage guidelines differ from state to state and it is the buyer to seek guidance on how best to use the process.
What Do Mortgage Closing Costs Cover For The Buyer?
Mortgage closing costs are charged to buyers that take out home loans. The buyer pays a variety of fees and charges to the lenders and third parties. What is included in closing costs for buyers is the loan application and processing fee, property tax, insurance, and at times homeowner’s association dues?
Fees that tend to be non-negotiable are the appraisal charges and credit reporting fees. Lenders must inform the buyer of the prepaid costs so that they can make adequate provision with the lender if necessary. Buyer closing costs can be rolled into the total mortgage loan amount and paid through monthly installments.
Below are the 3 main categories of mortgage closing costs fees.
1. Lender Fees
Lender’s fees include an origination fee for creating the loan. This is usually 1% of the loan. Application fees for processing the loan are also part of lender fees and these are usually about $300.
The final cost included in lender fees is prepaid interest fees. This is a daily interest charge for the days remaining in the first month’s mortgage interest fees. Concluding the mortgage loan process at the end of the month reduces the amount of prepaid interest one has to pay.
To reduce the number of interest rates to be paid some lenders will charge discount points. This is an optional amount whereby they charge 1% of the loan being advanced for a 0.25% interest rate reduction. The opposite of discount points is rebate points where a higher interest rate is paid by the buyer but some amount is received from the lender upfront.
Because of the wide pricing variance on lender fees, borrowers must shop around for loan estimates from at least three lenders. This will help them get the best deal.
2. Third-Party Fees
Third-party fees come from service providers like home inspectors and attorneys. When combined, they can amount to thousands of dollars. Where the fees are not fixed buyers are free to shop and negotiate for the best prices.
3. Homeowner Closing Cost Fees
This is an amount paid into a temporary bank account (escrow) that will be used to make timely payments of expenses associated with the loan. The lender may ask for an amount that covers at least six months’ payments for property tax, insurance, and related dues.
Failure to pay tax may result in the government seizing the house and the lender losing out on their mortgage payments. The homeowner closing cost fees protects the lender against such a situation.
What Do Mortgage Closing Costs Cover For The Seller?
The main cost that a home seller will face is the real estate commission which is usually 5-8% of the purchase price. The paid commission is shared by the agents of the buyer and seller. Sellers also pay fees that will cover legal fees, government taxes, and transfer fees. Transfer taxes are unique for each state with an average fee of approximately $800 for a $200,000 home in New York.
Closing Costs Key Takeaway
Homebuyers and sellers should always budget for mortgage closing costs when buying or selling a house. The government requires that lenders list closing costs on every mortgage applicant’s loan estimate form and on the official closing disclosure document. Some of these fees are negotiable so buyers can end up paying less than quoted. For more home buying tips such as how to get property tax exemptions, read the rest of our blog.