Before you start the mortgage process, it is important to understand the various fees and closing costs that are involved. After you have saved for a down payment, applied for a mortgage, and found a home you want to purchase, it is time to prepare for the closing costs that are involved. Understanding these costs and properly budgeting for them will make the home buying process much easier.
Closing costs include various fees for the services and expenses required to finalize a home loan. You will have to pay closing costs whether you are buying or refinancing a home. Most closing costs are covered by the buyer, but the seller does have to pay a few fees as well.
How Much Are Closing Costs?
Closing costs differ for each buyer but normally run between 2% to 5% of the home loan amount. The best way to pay your closing costs is by paying them out-of-pocket as a one-time expense. Your lender may let you include these costs in your loan, but this will increase your monthly payments and the interest you need to pay on the life of the loan.
Your lender will outline your closing costs in the Loan Estimate you receive when you first apply for the loan. You can also view your closing costs in your Closing Disclosure document. Review these documents closely to understand the various fees involved in closing on your new home.
Mortgage Related Fees:
- Application Fees – This covers the cost of processing your request for a new loan. This includes the cost of credit checks and administrative fees. Application fees vary depending on the lender and the amount of work it takes to process your loan application.
- Assumption Fee – If the seller has an assumable mortgage, which gives a buyer the opportunity to purchase a home by taking over the seller’s mortgage, there will be a fee charged to the buyer based on the balance.
- Attorney’s Fees – Some states require a real estate attorney to be present at the closing of a real estate purchase. This fee will vary depending on the number of hours the attorney works.
- Prepaid Interest – Lenders may require buyers to pay the interest that accrues on the mortgage between the settlement and the first monthly payment date. This is normally paid at closing and depends on your loan size.
- Loan Origination Fee – Also known as an underwriting fee, this is charged by the lender for evaluating and preparing your loan. This covers document preparation, notary fees, and lender’s attorney’s fees. Expect to pay around 0.5% of the amount you are borrowing.
- Appraisal Fee – A home appraisal is important because it proves to the lender that the property is worth as much as the borrower wants to borrow for their mortgage. The appraisal will help the lender verify the amount needed for a loan and make sure they can recoup the value of your home if you default on the loan. The average cost of a home appraisal ranges from $300 to $400.
- Home Inspection – Most lenders will require a professional home inspection before approving your mortgage. A home inspection will make sure the home is structurally sound and safe to live in. Home inspection fees range from $300 to $500.
- Mortgage Insurance Application Fee – If your down payment is less than 20%, you will have to get private mortgage insurance. The application fee varies by lender and loan type.
- Upfront Mortgage Insurance – Some lenders will require borrowers to pay the first year’s mortgage insurance upfront, while other lenders will 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 will have to pay FHA mortgage insurance premiums. If your loan is insured by the Department of Veteran Affairs or the U.S. Department of Agriculture, you will have to pay guarantee fees.
Full Breakdown of All Fees That May Be Involved:
- Appraisal fee ($300-$400)
- Home inspection ($300-$500)
- Application fee (varies)
- Assumption fee (varies)
- Attorney’s fee (hourly)
- Prepaid interest (based on loan amount)
- Origination fee (~ 0.5% of loan amount)
- Discount points (1 point costs 1% of the loan amount)
- Mortgage broker fee (0.50% to 2.75%)
- 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)
- Upfront HOA fee (varies)
- Homeowners insurance (depends on home value and location)
- Title search fee (~ $200)
- Lender’s title insurance (varies)
- Owner’s title insurance (~0.5% to 1% of purchase price)