Mortgage Closing Costs

If you’re buying a home, chances are you’ve heard about closing costs. But do you know which of the closing costs you’re responsible for? Like it or not, sellers pay some closing costs, but buyers are responsible for paying most of them. And they really add up. On average they’ll cost a borrower between 3 and 6 percent of the amount borrowed.

You get an idea of how much you’ll be paying towards closing costs early into the loan approval process. A few days after you apply for a mortgage, you’ll receive a Good Faith Estimate; a document that’s mandated under the Federal Truth In Lending Act. Keep in mind that this document merely estimates your costs and so these costs may change. Also, it is always a good idea to shop different lenders to obtain at least 3 such estimates. That way you can choose to work with the lender offering the lowest estimated costs.

The HUD-1 Settlement form, which you can obtain from your lender a day before settlement, is an accurate account of your closing costs. If you see something on that document that you don’t understand, speak up right away and ask for an explanation.

Closing costs vary from state to state, but the following is a list of costs you’re likely to be responsible for at closing:

Discount Points

Discount points are quoted in numbers that translate into dollars and are offered in exchange for a lower interest rate. One point is equal to 1% of the loan amount, so if you’re paying 1.75 points, the amount paid at closing is 1.75% of the loan amount. When considering a 30-year loan, each point paid lowers the interest rate by approximately 1/8th (or .125) of one percent. Paying points in exchange for a better interest rate usually makes the most sense when you plan on remaining in the home you’re buying for a long time.

Origination Points

Also called a Loan Origination Fee, this is paid to the lender by the borrower for the evaluation, preparation, and submission of a proposed loan. Like discount points, origination points are expressed as a percentage, with each origination point equal to 1% of the amount of the loan. Origination points, if they are charged, will either be added to the points or they will be quoted as additional points (an additional cost). Different lenders have different ways of charging these points.

Application Fee

This fee is charged by lenders to cover the costs associated with processing loan information. Since a lender conducts the application review process even if you’re not approved, or you choose not to take the loan, this fee typically is not waived. This fee is sometimes paid when you apply but can also be included as part of the costs paid at the time of closing.

Appraisal fee

This fee usually ranges from a low of $150 to a high of $400 and is paid to the independent entity that performs an important part of the mortgage approval process: conducting a fair market appraisal of the property the borrower hopes to purchase. When conducting an appraisal, the appraiser considers the property’s location, current use, selling price of comparable properties in the area, the home’s condition and age, present cash value, net proceeds from the property’s sale, and more. Required by the lender, the appraisal helps the lender determine the mortgage amount the lender feels comfortable approving. Borrowers typically can obtain a copy of the appraisal upon request.

Credit Report Fee

The lender will order credit reports for all individuals listed on the mortgage application. The Credit Report Fee covers the cost associated with requesting copies from one or all 3 of the major credit reporting agencies and their review. Anticipate paying between $45 and $55 for this.

Title Search/Title Insurance

Before title to the property can be transferred, the lender wants assurance that there are no claims against the property. The way they get this assurance is by examining the history associated with the property for which the mortgage is being sought. Title search experts look at property deeds, court records, and other official documents for potential problems with the title.

Survey Fee

A survey is a way to confirm a property’s boundaries and ensure no other structures have encroached upon its boundaries. Usually ordered either by the lender or the title insurance, anticipate paying between $225 and $350, depending on the state in which the property is located and the property’s size.

Escrow Account

Some items, including homeowner’s insurance, real estate taxes, and when applicable, private mortgage insurance, are due after closing. Therefore, many lenders require a borrower to set aside money in an escrow account so that funds will be available as soon as these bills come due. The amount lenders require to be held in escrow is limited by HUD regulations.

Flood Certification

A flood certification, which can cost around $30, provides proof that the property is not located within a flood zone. When this is not the case and the property is in a flood zone, a lender will require the borrower to obtain flood insurance.

Recording and Transfer Fees

This fee covers the lender’s costs associated with preparing the paperwork that is needed to properly record the home’s purchase transaction. Fees vary and usually range between $50 and $150.

Documentary Stamp Tax

This is a tax based on the amount borrowed. The typical tax rate is 35 cents per $1,000 borrowed.

Interim Interest

This closing cost covers the amount of income tax accrual that takes place from the day of closing through the last day of the corresponding month.

Attorney Fees

Both the buyer and the lender may utilize the services of an attorney to prepare and review the documents needed during the loan approval process. Expect to pay anywhere from a low of $500 upwards of $1,500.

Note that it’s common for a lender to require payment for the application fee, the appraisal fee and the credit report fee at the same time you submit your mortgage application.

Closing costs can generally be divided into two groups: government fees and mortgage fees. Prepayment of property taxes, recording fees, and transfer taxes, both state and local, fall under the government group. Local government fees usually do not vary among lenders.

An appraisal fee, title insurance, hazard and mortgage insurance, survey fees, credit report fees, loan origination and documentation fees, commitment and processing fees, and interest prepayments are all considered the costs of obtaining a mortgage. Although the fees associated with credit reports, appraisals, and title insurance should be similar no matter which lender you choose, this may not always be the case.