If you’re financing the purchase of a home with a mortgage, there are costs that will need to be paid at the loan closing. While most mortgage closing costs are paid by the homebuyer, some will be paid by the seller and some will be prorated by date. The Loan Estimate that you receive from the lender will give you an idea of these costs. While these costs can differ, it’s important to understand what to expect.
Loan Origination Fee – A percentage of the loan amount, typically between 0.5% to 1%, and charged to cover the lender’s operational costs of processing a new loan application.
Discount Points – A prepaid fee if you want to lower the amount of interest on future payments. Generally, each point costs 1% of the total loan amount. For example, on a $200,000 loan, each point would cost $2,000. Discount points are tax deductible for the years in which they were paid. (You should consult a tax advisor for information regarding your specific situation and the deductibility of interest and charges.)
Appraisal Fee - This covers the cost of the appraisal, and is typically between $300 and $450. The actual cost can vary depending upon several factors, including the size and location of the property. Most lenders require that you use their designated appraiser.
Flood Certification Fee - Covers the cost of a government-required document, which shows if the property is located in a flood zone. If so, you are required to obtain flood insurance.
Credit Report – A credit report is required for most mortgages and summarizes your history of repaying debts, both past and present. If you have a high credit score (720 and above), you can expect to be offered lower interest rates and may get flexible loan terms.
Processing Fee - Charged by the lender to process the loan application.
Underwriting Fee - Charged by the lender to review and approve the mortgage.
Prepaid Interest - Since mortgage interest is paid in arrears, lenders collect this interest from the day the loan closes until the end of the month, before the first payment is due.
Private Mortgage Insurance – This is dependent on your loan-to-value ratio. If you decide to put down less than 20% of the home’s value, you may be required to payprivate mortgage insurance (PMI). PMI protects the mortgage lender in case you default on payments. Conventional loans require that PMI be paid monthly. However, some Federal Housing Administration (FHA) loans collect this upfront as a lump sum at closing and then also monthly.
Settlement Charges - The settlement agent (many times, the title company) will charge you certain fees related to the closing, such as notary fees and attorney or closing fees.
Recording Fees - This is paid to the city or county for recording the mortgage, deed and any other legal documents related to the transaction.
Hazard Insurance – Protects you from property damage caused by fire, earthquakes, and other natural events. Depending on your policy, a year’s worth of payments is typically collected at the time of closing. Lenders typically require proof of hazard insurance at or before closing.
Escrows - The lender will collect the amount equal to usually two months payment for hazard insurance, mortgage insurance, school tax, property tax and flood insurance (if needed). These funds are held in an account until the lender receives and pays these bills. Throughout the life of the loan, these costs will be collected along with your monthly mortgage payment.
Other Fees - Pest inspection and/or survey fees, if required.
Closing costs - Out-of-pocket money that you must pay to complete the mortgage transaction. Some types of mortgages will allow these expenses to be included in the mortgage amount. In some cases, a lender credit can help you cover these costs.