When I bought my first home I had only ever considered saving for my initial down payment, I had no idea that there were additional closing costs and fees associated with originating a new mortgage loan! Closing costs are typically around 2%-6% of your total loan, which means they are not a small cost you want to be surprised by after you have an offer accepted on a home.
The good news is some of these fees you can shop for/negotiate and depending on the type of loan, you can negotiate to have some or all of your closing costs covered by the seller. Understanding all the fees associated with your mortgage will help you save for the total cost of your new home purchase and advocate for yourself while searching for a lender and negotiating your home purchase price/terms.
What Your Lender Owes You
Before we get into the details of what closing costs include, know that your lender is required to provide disclosures of these costs to you and is the best resource for questions specific to your situation.
Loan Estimate: This document is a general estimate of what your monthly mortgage payment and closing costs will be. Lenders are required to provide a Loan Estimate within three business days after youve applied for a mortgage.
Closing Disclosure: This document is similar to a Loan Estimate but has the final numbers for your monthly mortgage payment and all closing costs. Lenders are required to provide a Closing Disclosure to you three days before your scheduled closing.
Now lets get into the different fees you will see included on your closing costs:
Loan origination charges: Fees the lender charges to underwrite and process your loan. Estimated around 1% of your total loan, these charges are negotiable/will vary by lender.
Discount points: These are optional and are used to buy down the interest rate on your loan. One point is equal to 1% of the total loan and typically lowers the interest rate by a quarter of a percentage point. Your lender can help you analyze the current interest rates and if buying down your interest rate is worth the additional expense. The cost of discount points will vary by lender.
Appraisal Fee: this is used to verify the value of the property; banks do not want to lend $100,000 for a property that is only worth $80,000. This is a fixed fee, typically around $500.
Flood determination and monitoring fees: These cover the cost of determining if the property is in a flood zone and notifying the lender if the flood zone changes. Lenders are looking to verify the asset they are financing is not in imminent danger of washing away. This is a fixed fee.
Pest Inspection Fee: Not always required, but similar to the above this pays for the lender-ordered wood-destroying organism report, banks do not want to finance an asset that is actively being eaten away. This is a fixed fee.
Tax Monitoring and Research Fees: Used to pay for verifying the amount of property taxes you owe and payment of those taxes. This is a fixed fee.
Title Search Fee: Covers the cost of making sure the person selling the house actually owns it, this fee will vary by title insurance company and region but is typically around $500.
Lender’s Title Insurance Premium: If the above search does not uncover a hiding title issue, this is a policy to protect the lender if someone makes a claim of ownership on the property after it’s sold. The price of the policy will vary.
Owner’s Title Insurance Premium: Just as your lender is protected from title issues, so are you and this premium covers that, this is not required but strongly encouraged to protect your interests. Similar to the above the price of this policy will vary.
Other Title Service Fees: Depending on your lender and home purchasing situation these may include title closing and other charges, including the cost of an attorney.
Government Recording Fee: This is an administrative fee that pays for your local government to update property ownership records. This is a fixed fee.
Home Insurance Premium: Most lenders will require you to purchase home insurance before you close on a new property, this is a fee I encourage clients to shop around for the best rate both while closing on their new home and on an annual basis. Typically, it costs around 0.5% of the homes value.
Prepaid Interest: This covers the amount of interest that will accrue on the mortgage between the date of closing and the first monthly payment due date. This is a fixed fee determined by the terms of your new mortgage.
(Fun fact, did you know you can time your closing date to maximize the time before you make your first monthly payment? I timed the purchase of my duplex to have 2 months mortgage payment free after closing, but I had to pay for that interest up front on my closing date.)
Property Tax: This payment covers your prorated share of annual property taxes. Depending on your purchase date the seller will also pay a portion of these taxes. This is a fixed fee.
Initial Escrow Payments: These include deposits to start your escrow account, which will be used to cover property taxes, home insurance and, if it applies, private mortgage insurance. Typically, you’ll deposit enough money to cover two months of these costs.
While it may feel overwhelming to read all these fees, know that it is your mortgage lenders role to help you understand these fees and disclose them to you the best lenders will always walk you through any questions you have. Remember, most people are only buying a house every 5+ years so even if youve bought a home previously lenders are not expecting that you will remember every step of the process!
I have found Nerd Wallet’s Closing Cost Calculator to be very helpful in visualizing these fees as well. Not sponsored in any way, I frequently use Nerd Wallet as a reference for all things related to personal finance!
As always, any questions Im always here to help.
xx,
Claire
