Closing Costs

What Will I Pay?

Closing costs are funds, in addition to a loan down payment, paid at settlement. These costs typically total 3% to 7% of the home’s purchase price. Cash transactions may have fewer costs than financed purchases.

There are a number of small fees included in closing costs that fall into three categories: lender charges, third-party charges, and prepaid items.

Most lenders will combine all smaller charges into one origination fee. This is usually the biggest closing cost. Other charges may include title company fees, HOA fees, and home appraisal fees.

A standard form called the loan estimate will detail which items you can shop for and which are fixed.

You’ll want to compare estimated closing costs along with rates when you’re choosing a mortgage or refinance company.

Closing Cost Fees

Loan Origination Fee

This fee covers the lenders administrative costs in processing the loan. A one-time fee often expressed as a percentage of the loan. The origination fee is typically 1% of the loan, but you can obtain a loan with no origination fee and a slightly higher interest rate.

Loan Discount

Often called “points”, a loan discount is a one-time charge used to adjust the yield on the loan to what market conditions demand. One point is equal to 1% of the loan amount. This fee is often not added since interest rates are so low.

Appraisal Fee

This is a one-time fee that pays for an appraisal- a statement of property value for the lender. The appraisal is made by an independent fee appraiser and can cost on average $500 to $1,000 or more depending on the homes size and location.

Credit Report Fee

This one-time fee covers the cost of the credit report that is run by an independent credit reporting agency and is usually about $75.

Escrow Fee

This is the fee for the escrow company’s services. It is a one-time fee and is usually split with the seller. It is prorated based on the cost of the home and will cost anywhere from $900 to $3000.

Title Insurance Fees

There are two title policies: a lender’s title policy (which protects the lender against loss due to defects on title and to make sure the property can be legally transferred to you) and a buyer’s title policy (which protects you).

These are both one-time charges, but the one you usually pay for as a buyer is the lender’s title policy. It typically costs between $300 and $2,500. The title company may charge fees for a title search, title examination, document preparation, notary fees, recording fees, and a settlement or closing fee.

The seller traditionally pays the buyer’s title policy.

Document Preparation Fee

There may be a separate, one-time fee that covers preparation of the final legal papers, including the note and deed of trust. These legal documents run about $200.

Lender Fees

Other lender fees may include an underwriting fee, a flood certification fee, an amortization schedule fee, and other miscellaneous fees that should be disclosed by your mortgage lender at loan application. These fees vary dramatically from about $450 to $1000 and in some cases you may negotiate for the lender to reduce or eliminate them.

Prepaid Interest

Depending on the time of month your loan closes, this charge may vary from a full months interest to just a few days interest. If your loan closes at the beginning of the month, you will probably have to pay the maximum amount. If your loan closes at the end of the month, you will only have to pay a few days interest.

PMI Premium

If your down payment is less than 20%, and you have a conventional loan, you may be required to pay an up front-fee for mortgage insurance (which protects the lender against loss due to foreclosure). You may also be required to put a certain amount for Premium Mortgage Insurance (PMI) into a special reserve account (an impound account) held by the lender.

Property Taxes & Hazard Insurance

Depending on the month you close, you may be required to reimburse the seller for property taxes. You will also need to pay for an entire year’s hazard insurance premium up front. In addition, you may also be required to put a certain amount (usually the amount for two months) for taxes and impounds into a special reserve (impound) account held by the lender.

Final Thoughts

Anything is negotiable.
In a buyer’s market, when properties are slow to sell, anxious sellers frequently agree to pay part of the buyer’s closing costs. This is less likely to happen in a seller’s market when properties sell quickly.
Be sure to check with a reputable lender in your state to get the best rates.
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