Understanding the Closing Costs for Your Mortgage

When it comes to saving money to buy a home, you’ve probably been pretty focused on the down payment. But you’ll also need to plan for closing costs, which are due when your loan closes.

Some closing costs, such as the commission paid to the listing’s real estate agent, are typically paid by the seller. Other costs, such as a title search, title insurance, lender costs and homeowner’s insurance, are typically paid by the buyer.

Of course, there’s always room to negotiate – but choose your battles wisely. A seller will be much more open to negotiate when facing an offer of the full asking price or in a buyer’s market. Another option for these costs is to meet the seller halfway, dividing expenses between both parties.

How Much Are Closing Costs?

How much you’ll pay in closing costs varies according to the amount of your loan and tax laws in your area, but you can roughly expect to pay 3% – 6% of the purchase price. So, if you’re buying a $300,000 house, your closing costs could range from $9,000 – $18,000.

One way to bring down your closing costs is to pay discount points, which lowers your interest rate. A point is actually prepaid interest on the loan. Typically, one point costs 1% of the loan amount. The more points you pay, the lower your interest rate. If you plan to stay in your home for a while, paying points may be a smart way to pay less in interest over the life of the loan. If you’re interested, ask your lender for options on paying one, two or more points.

Finally, if you’re short on cash, ask your lender about a no-closing costs mortgage, where your closing costs are added to the loan amount. You won’t pay as much up front, but you will increase your monthly mortgage payments and likely pay more interest over the life of the loan.

Costs to Expect

By law, lenders are required to provide a loan estimate within three days of receiving your application. The estimate provides a detailed list of your closing costs, which would normally include:

• Appraisal: This will be mandated by the lender to make sure the home is worth the sales price. Most appraisers charge $300 – $500 for their services.
• Title/attorney fees: This includes necessary government filing fees, escrow fees, notary fees and other expenses related to transferring the deed. The cost of title and attorney fees varies significantly from state to state.
• Escrow fees: You may have to pay portions of property taxes and insurance upfront into an escrow account.
• Lender fees: This covers items ranging from administrative costs and pulling your credit report to wire transfer fees. If a lender boasts incredibly low rates, it’s possible they will try to make up the difference with additional lender fees, so be sure to compare apples to apples. Check out this video for an understanding of the difference between base mortgage rates and APR.
• Loan interest: You’ll need to pay interest on the loan prorated from the closing date to the first of the following month.
• Flood certification: If your house is situated on or near a flood plain, your lender may require documentation confirming its status, which involves paying around $15 – $20 for a certification from the Federal Emergency Management Agency (FEMA).

What’s Negotiable?

The loan estimate will help you understand what closing costs to expect and which you may be able to lower. You should ask the lender about fees you may not understand, or think could be lowered.

Lenders will schedule an independent appraisal by a qualified appraiser not affiliated with the lender or anyone else party to the mortgage transaction. There’s typically a set cost associated with appraisals based on the loan type and the area you’re in. However, other items like title insurance, pest inspection and the settlement agent may be open to negotiation. Of these fees, you’ll save most on title insurance and settlement (which are sometimes combined). But if you’re planning to comparison shop for title and settlement, do so quickly because these services take time.

Also, watch for miscellaneous fees like funding and delivery fees. If the fees seem vague, you may be able to push back to have them lowered or eliminated.

Closing Your Loan

Your escrow officer, title company or real estate agent will let you know when your loan is scheduled to close. Three days prior to the closing, you should receive your closing disclosure, which provides final details about your loan and closing costs. Compare these costs carefully to your loan estimate and make sure any changes you’ve agreed to with the seller are reflected in the final document.

On your closing day, you’ll need your state-issued photo ID and a certified or cashier’s check for the amount you owe. After you’ve signed all the documents and paid, your loan will be closed and you’ll walk away with the keys to your new home!

Questions? Contact a Home Loan Expert today or give us a call at (800) 785-4788. You can also feel free to leave us a note in the comments below.

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