We examine the numerous fees that could make up your mortgage closing costs
Imagine being only a few steps away from finalizing your mortgage and moving into the home of your dreams, only to find out that you still have to pay thousands of dollars in closing costs on your home loan.
Outside the down payment and monthly repayment costs, there are often various fees associated with closing a mortgage – and these costs aren’t always clear. Below, we look at some of these “hidden costs” to help you save up and prepare when buying a home.
What are mortgage closing costs?
Closing costs – also called mortgage fees – are charges on top of the purchase price of a real estate property. You’ll have to pay these fees whenever you buy a home or refinance your existing loan.
By law, these closing costs really aren’t hidden – you should receive an outline of fees in the loan estimate when you first apply for a mortgage and a closing disclosure statement from the lender prior to the settlement. A smart buyer would therefore carefully read through these fees and course any questions they may have to their broker.
One way to cover your closing costs is to pay the entire amount as a one-off expense. You can also fold these fees into the loan if your lender allows it, but you’ll have to pay more over the life of the mortgage in interest.
According to real estate firm ClosingCorp, homebuyers pay $5,749 in closing costs and taxes on average. However, the fees will often vary depending on your state, lender, loan type, and your creditworthiness.
Here are the fees that you will most likely encounter.
1. Appraisal and inspection fees
A bank or non-bank lender needs to verify whether the amount you want to borrow matches the property’s worth. This lets the lender know if it can recover its investment if you default on the mortgage loan. Since the task requires a certified appraiser, it may cost you around $350.
Similarly, most lenders require a home inspection to make sure that the property is structurally safe and good enough to live in. Depending on the severity of the results, you can choose to back out from the contract or negotiate a lower price.
2. Application fee
With most lenders, the very act of starting a home loan isn’t free. This fee usually covers the processing of your request for a mortgage, credit reviews, and other administrative expenses.
The fee itself varies across lenders and can be as high as $500. However, if you do your research, you can sometimes convince lenders to waive the fee through negotiation or by showing them estimates from competitors.
Read more: Broker anger over appraisal fees
3. Attorney’s fees
Some states and territories require the presence of a real estate attorney when closing a property purchase. These locations include Alabama, Delaware, Florida, New York, West Virginia, and Washington, DC.
Besides preparing and reviewing paperwork, lawyers can handle legal issues that may arise when you’re purchasing a home. Some lawyers charge $150 to $350 per hour, while others charge a flat rate between $500 and $2,000 for assisting on a real estate transaction.
4. Prepaid daily interest
This covers any pro-rata interest on your mortgage that’s expected to accrue from the date of closing to your first monthly payment. The interest amount depends on the total loan amount and your mortgage rate.
5. Loan origination fee
Also known as the underwriting fee, the origination fee covers a lender’s administrative expenses for preparing your mortgage documents and evaluating your application. This may also cover the lender’s attorney and notary fees.
The fee is typically between 0.5% to 1.0% of the loan amount, so you can expect to pay between $1,500 and $3,000 for a $300,000 home loan. Some banks don’t even charge origination fees, but they will likely charge a higher rate to cover their costs.
6. Escrow account or reserve fees
Also known as prepaids, some banks may require you to put a few months’ worth of expenses into an escrow fund as part of the mortgage agreement. The lender holds your escrow deposits in a special account and uses it to make payments on your behalf.
On average, lenders ask borrowers to put down two months’ worth of property tax and mortgage insurance payments at closing.
7. Private mortgage insurance
Speaking of insurance payments, you also need to pay for private mortgage insurance (PMI) if your down payment is less than 20% for a 15- or a 30-year fixed-rate loan. Just note that PMI protects the lender should you default and not your home in case of disasters.
“The exact amount you’ll pay for PMI depends on your lender,” says Rocket Mortgage. “But most homeowners pay $30 – $70 each month for every $100,000 they borrow.”
For an FHA loan, your closing costs will include an upfront mortgage insurance premium (MIP) if your down payment is less than 10%. You will also have to pay a monthly MIP fee over the life of the loan.
8. Homeowners insurance
By contrast, homeowners insurance will compensate you if your house gets damaged due to unfortunate or catastrophic events.
Also known as an HO-3 policy, it will pay to repair your home and possessions in case of fire, theft, and vandalism. It even provides liability coverage if a guest gets injured inside your property.
Lenders typically require borrowers to pay a year’s worth of home insurance upfront. You can expect to pay around $35 per month for every $100,000 in property value.
9. Property taxes
These are fees that you pay your state government in exchange for public services like fire departments, roads, and public schools. The amount that a homeowner pays each year largely depends on the property’s assessed value and local tax rates.
Lenders will typically roll property taxes into your monthly mortgage bill and put it into your escrow account. Doing this protects the lenders from having to pay the remaining property tax in case of a foreclosure.
Otherwise, you will be asked to pay a third-party fee for tax monitoring services. These will keep tabs on your property tax payments and inform the lender in the event of failed or late payments.
10. Title search fees
Usually performed by real estate lawyers or title insurance companies, a title search lets the lender and buyer know whether there are outstanding claims or liens against the property.
For instance, unpaid taxes and bankruptcies can mean that the seller doesn’t technically own the house that they’re selling.
A title search may be a labor-intensive task, particularly in locations where real estate records aren’t digital. You can expect this to add $300 to $400 to your mortgage closing costs.