Closing costs are the fees that you are required to pay to numerous third parties when your mortgage funds. Closing costs are typically thousands of dollars and are important to keep in mind when you get a mortgage. In many cases borrowers have saved money for their down payment but they do not have enough funds to pay for closing costs which may prevent them from buying a home. Understanding how much closing costs are before you start the mortgage process helps you prepare financially and avoid unfortunate surprises.
There are over 35 closing cost items that you may be required to pay and they can be separated into two categories. Non-recurring closing costs are one-time, upfront fees that you to pay to process your mortgage including lender, appraisal, title company, settlement agent or attorney costs. These costs also include numerous smaller fees including a credit report fee, flood certification and monitoring fees, government recording charge, notary fee, tax monitoring fee, HOA certification fee and optional items such as home or termite inspection fees. A full list of potential non-recurring items is outlined in the table below. Non-recurring closing costs are set by the specific service provider and you may be able to shop around to reduce your cost for certain services. Please note that the lender selects the appraiser so you usually cannot negotiate this fee.
Recurring closing costs are costs that you continue to pay after your loan closes including interest expense, homeowners insurance, pro-rated property taxes as well as homeowners association (HOA) dues and mortgage insurance fees, if applicable. You continue to pay these costs as long as you have a mortgage and own your home. You are required to pay a portion of these ongoing expenses when your loan closes and the specific cost amount is calculated based on at what day of month the mortgage closes. For example, you are required to pay mortgage interest from your closing date until the end of the month in which your loan closes. So if your loan closes earlier in the month, this cost item is higher. You can to shop around for selected recurring cost items including your mortgage and homeowners insurance but the cost for other expenses such as property tax, mortgage insurance and HOA dues are set by third parties and are non-negotiable.
In addition to recurring and non-recurring closing costs, you may be required to pay prepaids if you are required to use an impound account after your mortgage closes. An impound account is a trust or escrow account managed by your lender that is used to pay costs such as homeowners insurance, property tax and mortgage insurance. Instead of you paying these costs directly, the lender pays them on your behalf using the funds in the impound account. You are typically required to have an impound account if your loan-to-value (LTV) ratio at closing exceeds 90%.
The lender usually requires you to pay prepaids in advance to make sure there are sufficient funds in the account to pay these costs when due over the first year of your mortgage. For example you may be required to prepay a year or more of your property tax, homeowners insurance as well as several months of mortgage insurance fees and HOA dues, if applicable, into the impound account at closing.
Closing costs vary depending on the lender, loan program, mortgage amount, property type and property value, with larger loans and more expensive properties having higher costs. Property location is also a factor as counties with higher property tax rates increase your recurring costs. Additionally, closing costs for condos and co-ops may be higher because mortgages for these types of properties require additional documentation.
Paying an upfront mortgage insurance premium or funding fee, such as for FHA and VA loans, can significantly increase your closing costs. Less common mortgage programs may also require higher fees. Your costs are also greater if you choose to pay discount points to obtain a lower interest rate. Lender fees are usually the largest component of non-recurring costs although you may be able to obtain a low or no closing cost loan, usually by paying a higher mortgage rate. In sum, there are multiple inputs based on your specific mortgage, property and lender that affect the amount of closing costs you pay.
Although there is no fixed dollar amount, non-recurring closing costs should be in the range of 0.5% to 2.0% of your property value. So if you are buying or refinancing a $100,000 property, closing costs should be approximately $500 - $2,000. If your closing costs exceed 2.0% of your property value, that should raise a red flag and you should carefully review the costs items. Please note that this figure is for non-recurring closing costs and does not include recurring expenses. Recurring costs can significantly increase your total closing costs and vary depending on when your mortgage closes and other factors.
The table below shows closing costs and mortgage rates for lenders in your area. We recommend that you contact multiple lenders to request loan terms including closing fees and interest rates. Shopping for your mortgage and comparing proposals is the best way to save money on closing costs.
A common question borrowers ask is can I add closing costs to my loan amount? Or put differently, can I finance my closing costs? From a technical standpoint, for a home purchase mortgage , except for upfront mortgage insurance fees for an FHA, VA or USDA loan, you are usually required to pay for closing costs out of pocket and cannot include most closing fees in your loan amount. Practically speaking, however, there are several ways for you to finance closing costs.
First, lenders charge different mortgage rates depending on the amount of closing costs they charge. Mortgages with higher interest rates usually have lower closing costs and loans with lower rates have higher closing costs. For example, a loan with a 4.500% rate may have $2,000 in closing fees while a loan with a 4.250% rate may have $2,5000 in costs. You may be able to pay a higher mortgage rate and receive a rebate from the lender to pay for part or all of your closing fees. Paying a higher mortgage rate increases your monthly payment and may end up costing you more in interest expense in the long run but the lender rebate can help you pay for closing costs.
The second way to effectively finance your closing costs is to have the property seller pay for closing costs. In short, you can negotiate with the seller to refund a portion of the purchase price back to you at closing to pay for closing costs. For example, you may offer a property seller $150,000 and request that $3,000 of the purchase price is used to pay your closing costs. This basically enables you to add closing costs to the mortgage amount which can significantly lower your out of pocket expenses.
Please note that selected government-backed mortgage programs such as the FHA, VA and USDA home loan programs allow you to include the cost of certain upfront mortgage insurance and funding fees in the loan amount. You can also add the cost of discount points to your mortgage in most cases. Additionally, many local governments offer closing cost grants to help individuals with moderate-to-low incomes.
If you are refinancing your mortgage, you typically can include closing costs in your new loan as long as you qualify for the loan and you have enough equity in your home to support the higher loan-to-value (LTV) ratio. This is why many lenders offer no cost refinances when the borrower either pays a higher mortgage rate or the costs are added to your loan amount.
One tip you can use to quickly identify excessive closing costs is to compare the Annual Percentage Rate (APR) presented in the Loan Estimate to the mortgage rate. A lender must provide borrowers a Loan Estimate that outlines the key terms of the mortgage including interest rate, APR, closing costs and mortgage features within three business days of the borrower submitting a loan application. Most lenders will provide you a Loan Estimate if you request a mortgage quote even if you do not submit a loan application.
You can find the APR on the top of page three of the Loan Estimate. In short, the APR represents what your interest rate would be if it included all upfront lender and closing costs so it is a way to use one figure to compare both the interest rate and closing costs for a mortgage. If the APR is close to your mortgage rate -- for example if the mortgage rate is 4.500% and the APR is 4.575% -- then you know that the closing costs are relatively small. If the APR is much higher than your mortgage rate -- for example if the rate is 4.500% and the APR is 5.500% -- then you know that the closing costs are relatively high and you should negotiate lower fees or select a different lender. Additionally, if you have proposals from two lenders that are offering the same mortgage rate but one APR is lower than the other, then you know the lender with the lower APR is charging lower closing costs and superior mortgage terms.
The table below outlines typical mortgage closing cost items and attempts to capture most costs across the mortgage industry. Please note that costs vary by geography, lender and other factors. For example, lenders in different states may use different terminology for similar fees. Additionally, in some states a lawyer administers the mortgage closing process instead of an escrow company so it is unlikely that you would be required to pay for both. Other closing costs such as mortgage insurance are not applicable to all borrowers and some fees such as discount points are optional for borrowers. So you are required to pay some but not all of the costs outlined below, depending on your location, lender, loan program and the fees you elect to pay.
The top part of the table outlines non-recurring closing costs including various lender fees, costs for third party service providers including the appraiser, title company, settlement agent and closing attorney as well as numerous smaller items such as certification and recording fees. The bottom part of the table summarizes recurring closing costs including interest expense, property tax, homeowners insurance, HOA fees, mortgage insurance and initial escrow payments.
The table describes each item and provides their approximate cost. We encourage you to review this comprehensive list to understand the closing costs you may be required to pay, if they are recurring or non-recurring and how much you should expect to spend on each item and in total. The more you know about closing costs, the more likely you are to save money when you get a mortgage.
Non-Recurring Closing Costs
Recurring Closing Costs
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‚ÄúLearn about loan costs.‚ÄĚ CFPB. Consumer Financial Protection Bureau, 2017. Web.About the author