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Mortgage Closing Cost Example
The example in the table below shows potential estimated closing costs and the total amount of money required at closing, including the down payment, when you buy a home. The example illustrates the two types of mortgage closing costs:
- Non-recurring closing costs: These are one-time, up-front costs that the borrower pays to various third parties to process and close the mortgage. Examples include lender, appraisal, title company, settlement agent / escrow and attorney (if applicable) fees. You pay these items when your loan closes and then you do not pay them again.
- Recurring closing costs: These are costs that the borrower will continue to pay after the mortgage closes such as interest (from the day your mortgage closes until the end of the month in which your mortgage closes), homeowners insurance, pro-rated property taxes and homeowners association fees (if applicable). Recurring closing costs are usually annual costs that you pay a portion of at closing and then you continue to pay these fees on an ongoing basis after your mortgage closes. For example, you continue to pay property tax and homeowners insurance as long as you own your home.
We use the following assumptions for the closing cost example:
The key points to highlight in this example are that the borrower makes a down payment of 20% so he or she does not have to pay private mortgage insurance (PMI) and because this example shows a conventional loan, the borrower does not have to pay an FHA mortgage insurance premium (MIP), VA funding fee or other upfront fee associated with government-backed mortgage programs. Additionally, the borrower is paying a flat lender fee of $995 as opposed to paying origination points or multiple lender fees to process and close the mortgage. The borrower does not pay discount points to lower the mortgage rate.
The borrower uses an escrow company as opposed to a real estate attorney. Escrow companies are typically used in the western U.S. while real estate attorneys are typically used in the eastern U.S. Because the mortgage closes on March 15th, the borrower is required to pay interest expense from March 15th through the end of the month (16 days) and property tax from March 15th through June 30th. You are required to pay prepaid interest at closing from the date your loan closes until the end of the month in which it closes. You are also required to pre-pay prorated property tax from the date your loan closes until the date your property tax is due.
The example below shows non-recurring closing costs separate from recurring closing costs and also includes the down payment required to purchase the property. The example does not show that the borrower holds savings in reserve at the time of mortgage closing but this is always a good idea. As illustrated by the example, your are usually required to pay thousands of dollars upfront at closing including both closing costs and your down payment. Borrowers should be aware of mortgage closing costs before they start the home purchase process so they are not surprised by the amount of funds required to close their loan.
This example shows estimated closing costs for this specific example and is provided for informational purposes only. Your actual closing costs depend on many factors including location property value, mortgage amount, loan program and lender. Closing costs are typically higher for larger mortgage amounts and higher-priced homes. Additionally, the costs for certain loan programs are higher, especially if they require additional documentation or effort on the part of the lender. Where your property is located is another important factor as higher property tax rates increase your recurring closing costs. Finally, loans that close earlier in the month and year also usually have higher recurring costs due to higher partial interest expense and pro-rated property taxes. Review the example below and then be check with your lender to determine the closing costs based on your specific situation.
The table below shows mortgage rates and closing costs for leading lenders in your area. We recommend that you contact multiple lenders in the table and compare loan proposals. Shopping for your mortgage and comparing lenders enables you to find the best mortgage terms including the lowest closing costs.
Sources
"Down Payments & Closing Costs." My Home by Freddie Mac. Freddie Mac, 2019. Web.
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