June 29, 2018
June 29, 2018
One of the most common concerns of new home buyers is the amount of the down payment they will need to make. But there are also fees associated with your mortgage closing that can affect how much money you’ll need to come up with in order to close. Those fees include both closing costs, and what are known as prepaid expenses. They apply on both purchases and refinances.
What are they, and how much can you expect to pay for them?
Generally speaking, closing costs are fees charged by either the lender or the attorney or closing agent. They can also include any third party fees that are required as a result of the application, processing, closing, or recording phases of the loan process.
Here is a list of common closing costs, with explanations of each. Some are standard charges, while others will depend on your location and even the type of loan that you are taking.
Loan origination fee. This typically appears as a percentage of the mortgage amount, ranging from 0 to 1%. It is the lender’s fee for handling your mortgage.
Loan discount fee. This is a fee that you pay in order to reduce the interest rate you will pay on your loan. It is also expressed as a percentage of your loan amount. For example, a 1% loan discount fee may reduce the interest rate you will pay on the loan by 1/8 of a percentage point, or 0.125%.
Commitment fee. This is a fee that some lenders charge upon loan approval. It is typically some percentage of the loan origination fee, which means that it is not an additional fee, unless no origination fee is indicated.
Appraisal fee. This is the fee paid to the appraiser who determines the market value of your property for lending purposes. It generally ranges between $300 and $500.
Credit report fee. The lender obtains your credit report from a third party source. The fee for that can be anywhere between $10 and $50.
Lender’s inspection fee. This fee will only be required if the lender must make an inspection of the property after the appraisal. The inspection is generally to make sure that repairs required by the appraisal have been completed. The amount depends on the lender, and can range anywhere from $50 to $200.
Tax service fee. In order to set up the property tax escrow on your loan, the lender must first determine that all prior taxes have been paid. This is another fee that is paid to a third-party, and can range anywhere from $25-$75.
Underwriting or Processing fee. Some lenders charge this as something of a paperwork handling fee. They’re not as common as they used to be, and they are not permitted in certain states. If they are charged, they can run anywhere from $100-$1,000 each.
Wire transfer fee. The funds for your loan closing will arrive by bank wire. The fee for this is usually between $15 and $35.
Closing/escrow fee. This fee can be charged by either an attorney or a title company as payment for their services, or a portion thereof.
Document preparation fee. This is another fee charged by either the attorney or the title company as part of its charge for handling the closing on your loan.
Attorney fee. This is a flat fee charged by an attorney who handles your loan closing. It can range between $350 and $600.
Recording fees. Your mortgage documents will need to be recorded at the county courthouse. There’ll be fees for doing so, which will range depending upon the fees required by the county.
State/County/Municipal taxes or stamps. Many state and local governments impose taxes on new mortgages as a way to increase revenue. These vary by jurisdiction and are not universally required.
Flood certification. The lender will need to determine whether or not the property or a portion of it is located in a floodplain. This is the document that is used to determine whether or not you will also need flood insurance. The flood certification usually costs about $20.
Pest inspection. This is an inspection done by a recognized pest control company to determine if there are any infestations in the property. It is generally less than $100.
Courier or postage fees. Any fees paid to third parties to deliver packages or paperwork, including the cost of certified or registered mail, will be included in your closing costs. This is usually very minor, but it will depend upon how much special handling is required during the closing process.
Title search. Any time a new mortgage is placed on the property, a title search is performed to determine if there are any liens against the property. The search can go back many decades.
Title insurance policy. This is an insurance policy required by the lender to cover them in the event that any liens are found to exist that the title search didn’t find. It’s basically the title company saying, “we searched and didn’t find anything, but if something comes out after the fact, we will cover it.”
Owner’s title insurance policy. This policy is neither a lender nor attorney requirement. It comes under the category of “something good to have”. The title insurance policy covers the lender only. By extension, it will cover you for the same liability. But settlement of such claim can take up to a year or two, during which time you’d be unable to sell the property or even refinance the mortgage. An owner’s title insurance policy generally costs $200-$300, and it will enable you freely sell your property or refinance the mortgage on it, even if a lien on the title does appear. Again, not required, but it can be money well spent.
Survey. This is usually not a requirement either, but it can be, in the event that there is any dispute in regard to property lines. It’s possible that no survey exists on a property, which would make it legally impossible to define the exact location of property lines. A survey is the solution, and can cost anywhere from $300 on up, depending on the size and location of the property.
Home inspection. Unless required by an appraiser, a home inspection is another optional, but highly recommended service. It’s your chance to have the property inspected by a licensed professional who can let you know if there are any structural deficiencies in the property. The cost for the inspection can range from $200 on up.
Prepaid expenses are basically charges connected with the establishment of loan escrows for the payment of taxes and insurance by the lender. Technically speaking, they are not closing costs because they represent prepayments, rather than direct charges.
The following are typical prepaid expenses:
Prepaid interest. Mortgage payments are made in arrears, which means that interest is collected at the time the payment is made. Since no payment is due on the first day of the following month after closing, the lender must collect interest covering the time from the day of closing until the end of the month. If your closing takes place on the 25th, and the month-end is on the 30th, the lender will collect interest to cover those five days. Meanwhile, no payment will be due on the first day of the first month after closing.
Mortgage insurance premium. If your mortgage requires mortgage insurance, the lender will typically hold two months of premiums in escrow. This will enable the lender to make your mortgage insurance premium, even if you don’t make your mortgage payment on time.
Hazard insurance premium. Also known as homeowners insurance, it is generally required by the lender (to cover against physical damage to the property), and usually included in your mortgage payment. If it is, the typical requirement will be a paid-up policy for one year, plus enough to make the premium for the next two months.
Property tax reserve/escrow. Depending on the amount of real estate taxes on the property and the due dates, this can range from a few hundred dollars to many thousands of dollars. The lender may collect as few as two months property taxes at the closing, or as much as 15 months. It all depends upon how property taxes are collected in your area.
Flood insurance premium. If your property is determined to be located in a flood zone, then flood insurance will be required. Exactly how much it will be will depend upon how much of the property is located in a flood zone, and how likely flooding is in your area. The escrow for flood insurance is handled similar to that of hazard insurance.
When it comes to mortgage fees, it’s easy to get lost in the details. What’s the bottom line – how much can you expect to pay for all the fees and charges associated with a new mortgage?
There’s actually a wide range, and much will depend upon lending and closing practices in your area, as well as the size of tax and insurance bills. But you can generally expect that your settlement costs will be somewhere between 2% and 5% of the property value.
So on a $200,000 mortgage, you can expect to pay somewhere between $4,000 and $10,000 in total closing fees.
But don’t be too upset by that range! There are a couple of ways that you can reduce those costs, or even make them go away completely.
If it is customary in your market area, the seller can pay part or all of your closing costs. Exactly how much they can pay depends on the type of loan you are taking.
On a conventional mortgage, either for a principal residence or a second home, the seller can pay up to 3% of the purchase price or value of the property, if the mortgage amount exceeds 90% of that value. The limit is 6% if the mortgage is between 75.01% and 90% of the property value. But the seller can contribute up to 9% if the loan amount does not exceed 75% of value.
On FHA mortgages, the limit is 6% across the board, and on VA loans, the seller contribution is limited to 4%.
But even if the seller won’t pay your closing costs, you still have another option.
Technically speaking, the lender doesn’t actually pay your closings costs. “Lender paid closing costs” refers to a process known as premium pricing. The lender charges you a slightly higher interest rate over the term of the loan, then applies the premium to pay your closings costs.
For example, a lender may increase your interest rate by 1/4 percent (0.250%) to generate a premium of 2% of the mortgage amount. If the loan is $250,000, then the lender will be able to pay up to $5,000 in closing costs.
This will generally be a good strategy to use if closing funds are limited, not the least of which because the higher interest rate is tax deductible on your annual income tax filing.
So don’t get frightened by closing costs. Know what they are and what the total will be. But most of all, know that you have options as to how to pay for them.
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