Mortgage Closing Costs
You've found the house of your dreams. It's within your budget! Your monthly payment is exactly what you'd like. You are ready to sign the papers and take possession.
Have you budgeted for closing costs?
A number of lenders try to help you prepare for mortgage closing costs by giving you a "Good Faith Estimate" of these costs. You may receive such a statement right away, but they are only required to mail it to you within three business days of application.
Because your mortgage lender does this, you may assume that all the closing costs are with the lender. Don't be misled by the lender's attempt to provide you with a service! The lender is only preparing an estimate of the costs you may incur when buying or refinancing. The lender isn't required to give you a comprehensive list of all the costs that you may face above and beyond the purchase price of your home. Nor does the lender actually know what all those costs might be. As a result, you should always anticipate that the actual costs are going to be more than the estimate.
For instance, are you buying a newly built home? Have you considered the costs to putting up window coverings as part of your closing costs? Having bought brand new homes more than once, it is definitely something to keep in mind if you want some privacy in your home in the first few days of moving in. This is one closing cost that no one will tell you about!
However, your lender will have to disclose all the closing costs that they normally charge, even if they can't guess the other charges that you might encounter. You can be looking at a wide range of closing costs from your lender, including:
- Loan Origination Fee: This fee is usually known as a loan origination fee but sometimes is called a "point" or "points." It covers the lender's administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders. Generally, the buyer pays the fee, unless otherwise negotiated.
- Loan Discount: Also often called "points" or "discount points," a loan discount is a one-time charge imposed by the mortgage lender or broker to lower the rate at which the lender or broker would otherwise offer the loan to you. Each "point" is equal to one percent of the mortgage amount. For example, if a lender charges two points on an $80,000 loan this amounts to a charge of $1,600.
- Appraisal Fee: This charge pays for an appraisal report made by an appraiser.
- Credit Report Fee: This fee covers the cost of a credit report, which shows your credit history. The lender uses the information in a credit report to help decide whether or not to approve your loan and how much money to lend you.
- Lender's Inspection Fee: This charge covers inspections, often of newly constructed housing, made by employees of your lender or by an outside inspector. (Pest or other inspections made by companies other than the lender are discussed in line 1302.)
- Application Fee: This fee covers the processing of an application for mortgage insurance.
- Assumption Fee: This is a fee that is charged when a buyer "assumes" or takes over the duty to pay the seller's existing mortgage loan.
- Mortgage Broker Fee: Fees paid to mortgage brokers would be listed here. A CLO fee would also be listed here.
While not all of these fees will apply in every situation, you should be prepared for some money to be going directly to your lender in fees. In some cases, you can have these fees included in the total amount of the mortgage, which can save you from some financial pain on closing.
In general, there are two broad categories of closing costs. Non-recurring closing costs are items that are paid once and you never pay again. Some of the fees associated with your mortgage are one-time fees for the life of the mortgage. However, recurring closing costs are items you pay time and again over the course of home ownership, such as property taxes and homeowner's insurance. You might wonder why property taxes would be part of closing costs. Well, in most regions, property taxes are actually paid in advance. This means that the previous owner will have paid some of the property tax that you will owe once you take possession. Part of your closing cost will be to refund the property taxes paid on your behalf, to the previous owner.
In addition to the closing costs charged by your mortgage lender, there are also costs associated with using a real estate agent. If you have sold a property using an agent, the agent's fees will be paid out of the proceeds of your home, and will be paid on closing.
Other fees will be associated with your lawyer. For instance, you will likely pay for a title search. You'll also pay for document preparation and other fees associated with the lawyer's involvement in your purchase or sale. In addition, the lawyer will be required to ensure that certain government fees are paid; you'll reimburse the lawyer for these fees if the lawyer pays them for you.
In general, you should be budgeting in the range of 2-3% of the value of your new home for closing costs of varying kinds.