What are Closing Costs
What are closing costs?
You want to buy a home but what exactly does that mean as far as money on hand? This can be a bit confusing for buyers and sellers alike. Most of the fees and cost are accrued by the buyer but sellers do end up having to pay a few as well.
How much are closing costs?
Average closing costs for the buyer run between about 2% and 5% of the loan amount. That means, if your home purchase is 250,000 you would expect to pay between $5,000 to $12,500 in closing costs.
Do you need to pay them out-of-pocket as a one-time expense? Yes and no. Your mortgage company might allow you to roll your closing costs into your loan but remember you will pay interest on those costs through the life of the mortgage, which can be costly.
But Lauren I don’t have that much!
Ok deep breaths there are some options that you should talk over with your loan officer if that much money is not a possibility for you at this time. First comparison shop. Many people are afraid to run their credit more then once to obtain a mortgage but credit card companies allow you to pull your credit for a mortgage several times with in a 45 day of your first application so apply away. Find the company you feel comfortable with and has the best terms for you including costing costs and fees.
State and cities offer low-interest loan programs or grants to help first-time home buyers with closing costs. Check with your local government to see what’s available.
» MORE: Find first-time home buyer programs in your state
Finally, if your still needed some money for those closing costs you can always ask for concessions from your seller. These are not guaranteed and sometimes hard to get in a sellers’ market but my theory is there is no harm in asking. If your other terms are favorable your sellers may just say yes.
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: The inspection of your home is such important part of you knowing all you can about your new home. You are not required to 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, a bank 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 $600. This average can increase depending on if you need extra areas inspected such as a larger home, septic or well inspection, etc
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.
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.
Discount points: By paying discount points, you reduce the interest rate you pay over the life of your loan, which results in more competitive mortgage rates. The cost of one point equals 1% of the loan amount. So for a loan of $250,000, a 1-point payment would be $2,500. Generally, paying points is worthwhile only if you plan to stay in the home for a long time. Otherwise, the upfront cost isn’t worth it.
Mortgage insurance fees
Mortgage insurance application fee: If you make a down payment of less than 20%, you may have to get private mortgage insurance. (PMI insures the lender in case you default; it doesn't insure the home.)
Upfront mortgage insurance: Some lenders require borrowers to pay the first year’s mortgage insurance premium upfront, while others ask for a lump-sum payment that covers the life of the loan..
FHA, VA and USDA fees: If your loan is insured by the Federal Housing Administration, you’ll have to pay FHA mortgage insurance premiums; if it’s guaranteed by the Department of Veterans Affairs or the U.S. Department of Agriculture, you’ll pay guarantee fees. In addition to monthly premiums, the FHA requires an upfront premium payment of 1.75% of the loan amount. The USDA loan upfront guarantee fee is 1%. VA loan guarantee fees range from 1.25% to 3.3% of the loan amount, depending on the size of your down payment.
Property taxes, annual fees and insurance
Property taxes: Buyers typically pay two months’ worth of city and
county property taxes at closing.
Annual assessments: If your condo or homeowners association requires an annual fee, you might have to pay it up front in one lump sum.
Homeowners insurance premium: Usually, your lender requires that you purchase homeowner’s insurance before settlement, which covers the property in case of vandalism, damage and so on. Some condo associations
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.
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. Title insurance is not required in Michigan, however, your mortgage provider may require you to have it to cover their investment. A discount is sometimes offered when both the lender’s and owner’s policies are purchased at the same time.
Mortgage closing documents
With so many closing costs to consider, you will be bombarded with paperwork just prior to and during the loan signing. Two of the most crucial documents are the Loan Estimate and the Closing Disclosure.
You’ll receive the Loan Estimate three days after applying with a lender. It will officially detail all fees, the interest rate and the other costs to close your loan. It’s legally binding, so you’ll want to read it carefully and ASK ANY QUESTIONS you have. Remember Loan officers do this every day but you don’t so don’t be shy to ask them to explain or go over something you don’t quite understand.
Then, three days from loan settlement and prior to making the big commitment, you’ll receive the Closing Disclosure from your lender. It confirms or makes small adjustments to what you saw on the Loan Estimate. Again, it’s worth a big cup of coffee and a thorough review.
Now I know we went over A LOT of information but to break it down in a clear dollar and cents way I have included this chart.
Mortgage closing costs: summary
- Appraisal fee ($300-$400)
- Home inspection ($300-$500)
- Application fee (varies)
- Assumption fee (varies)
- Prepaid interest (based on loan amount)
- Origination fee (about 0.5% of the loan amount)
- Discount points (1 point costs 1% of the loan amount)
- Mortgage insurance application fee (varies)
- Upfront mortgage insurance (0.55% to 2.25%)
- FHA, VA and USDA fees (1% to 3.3%)
- Property taxes (two months’ worth)
- Homeowners insurance (depends on home value and location)
- Title search fee (about $200)
- Lender’s title insurance (varies)
- Owner’s title insurance (0.5% to 1% of purchase price)