Mortgage Closing Costs and Fees Explained
Between the actual price of a property and the down payment, a home will probably be the biggest and most expensive purchase you’ll ever make.
But these aren’t the only expenses involved in a home purchase. You’re also responsible for paying closing costs, which are lender and third-party fees associated with the mortgage loan.
Closing costs vary, with the average ranging between 2 percent and 5 percent of the purchase price. These fees are inescapable and paid at closing, so it’s important to understand the cost of getting a mortgage early, so you know what to expect.
Here’s a list of fees you may face when purchasing a home.
Loan Origination Fee
The loan origination is a lender-specific fee that a mortgage company charges a borrower for originating a loan. It’s sometimes referred to as an administrative fee and generally covers the cost of processing a home loan application from start to finish. Other fees may fall under the loan origination fee, such as the credit report fee, application fee, courier fees and notary fees. Loan origination fees vary but are typically 1 percent to 2 percent of the mortgage amount.
Before closing on a mortgage loan, a neutral third-party will conduct an appraisal of the property to determine its fair market value. An applicant can’t borrow more than the value of a property, so lenders require this information before finalizing a mortgage loan. Average fees for a home appraisal range from around $300 to $500.
Discount points are a type of prepaid interest paid directly to lenders at closing in exchange for a reduced mortgage rate. This is an optional fee. But if you elect to pay discount points, a lower mortgage rate means that you’ll pay less interest over the life of the loan, and you’ll also enjoy a cheaper mortgage payment.
Typically, one discount point can reduce your mortgage interest rate by 0.25%. Each discount point costs approximately 1 percent of the loan amount. Therefore, if you get a mortgage loan for $250,000 and pay two discount points, you’ll pay an additional $5,000 in closing costs.
Before you buy down your mortgage rate, contemplate how long you’re likely to live in the home. Ideally, you should keep the mortgage long enough to recoup the additional cost. For example, if you pay two discount points at closing to save $75 per month, you wouldn’t want to sell the property or refinance the mortgage for at least 66 months or 5 1/2 years.
Most states require a title search before you’re able to purchase a property. This search can reveal any unpaid mortgages, liens or past due taxes linked to the property. It ensures that you receive a clear title with no claims on the property. It also confirms that the seller is the actual owner of the property, so that you avoid title issues later on.
A title company conducts the search and fees can average between $75 and $100.
You can also purchase owner’s title insurance, which is optional but recommended. This insurance protects you and covers legal fees should a title problem arise after closing. For example, a contractor who worked on the property before you purchased it may claim that they weren’t paid for work and attempt to put a lien on the property. Or an heir of a previous owner may make a claim against the title.
Owner’s title insurance is a one-time fee paid at closing and protects you for as long as you own the property.
In addition to discount points, you’re responsible for other prepaid items at closing.
Your first mortgage payment isn’t due until 30 days after closing. However, interest begins accruing immediately after settlement. You must prepay the interest that accrues between closing day and your first monthly payment.
Mortgage Insurance Premiums
Mortgage insurance is common when buying a home with less than a 20 percent down payment. This insurance protects the lender in case of default. If you have a conventional loan, the annual premium for private mortgage insurance (PMI) is between 0.50 percent and 1.00 percent of the original loan balance, and you may be required to pay the first month of premiums at closing.
If you have an FHA loan, you must also pay an upfront mortgage insurance premium, which is approximately 1.75 percent of the loan amount. You can pay the upfront premium in a lump sum at closing or roll it into the mortgage amount.
There’s no mortgage premiums with VA and USDA loans, but these programs do have upfront guarantee fees due at closing. The fee for loans insured by the U.S Department of Veteran Affairs average 1.2 percent to 3.3 percent of the loan balance, whereas fees for loans insured by the U.S. Department of Agriculture are about 2 percent of the loan balance.
Real Estate Tax and Homeowner’s Insurance Premium
Monthly mortgage payments include the repayment of principal and interest, mortgage insurance, property tax, and homeowner’s insurance. Therefore, it may come as no surprise that closing costs also include escrow deposits for real estate property taxes and homeowner’s insurance.
Any property taxes due within 60 days of closing are paid at closing. In addition, you may be required to pay your first year of homeowner’s insurance premiums at closing.
Be mindful of additional costs and fees associated with getting a mortgage, based on your particular home loan. This can include a pest inspection fee which covers the cost of inspecting the property for termites or dry rot, and some states require a survey before closing.
Other mortgage-related costs that aren’t paid at closing but worth mentioning include a home inspection (averages between $300 and $500) and flood insurance (averages $700 per year). A home inspection assesses the present condition of a home and can uncover major issues with a property. Flood insurance — protects your property from flood damage — is required if you live in a designated flood area.
The fees and amounts may vary with each lender. Your lender should provide a breakdown of all the fees and costs associated with your specific loan that are expected to be due at closing.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.