What is included in mortgage closing costs and how much can I expect to pay?

Closing costs can be a bit of a mystery, especially to first-time home buyers. Most know that when they buy a home, these costs are part of the mortgage transaction. But the phrase is a bit nebulous and some borrowers can be surprised by the amount they have to pay once they finalize their mortgages.

What to expect

Closing costs can comprise any number of expenses above a home’s purchase price. That can include lender costs, title search, attorneys’ fees, and any payments toward taxes and homeowners’ insurance, among others. Once borrowers start the mortgage application process, they should talk with their lenders to learn everything they will be expected to pay. Also, borrowers should receive a document that gives an estimate of closing costs along with the loan estimate that comes within three days of a lender receiving their application.

Some costs borrowers will pay:

• Closing costs will comprise about 2-5% of the home purchase price. Depending on the loan size, local taxes, and fees.
• Three days before closing, borrowers should receive a closing disclosure form, which gives the final details of the loan and closing costs.
• Three separate types of closing costs: lender fees, title fees, and prepaid costs.
• Lender fees — Some lenders wrap costs into one origination fee. Others break them down line by line of costs like courier fees, appraisal costs, administrative fees, processing fees, credit check, transfer taxes, underwriting fees, and flood certification
• Title fees – Title fees can take up to as much as 70% of closing costs. The costs include title search, title insurance, and settlement services. Title insurance premiums may not differ all that much but settlement fees can be quite different among companies. Lenders require buyers to purchase title insurance, which covers lenders up to the amount loaned. Real estate agents recommend getting owner’s title insurance to protect their own investment in the home. Both types of insurance provide protection if someone claims an ownership right to your home or has not been paid for work on the property and has a lien against it. This type of insurance can help protect a home’s new owner in case the previous owner did not pay taxes on the property.
• Prepaid costs – This would include the escrow accounts where owners pay homeowners insurance and property taxes monthly in addition to their mortgage payment. That is, unless the borrower puts more than 20% down as a down payment. Borrowers may also be asked to pay 2-6 months worth of property taxes ahead of time, depending on when the bill is due. Borrowers may also have to pay some sort of homeowners association fee if they live in a gated community, condo or townhouse community.

Closing costs not only come when you buy a home, you will have to pay them if you refinance or take out a home equity loan.

• Closing costs depend on the price of the home and the location. Closing costs usually include an appraisal, credit check and a title search.
• Industry experts say that borrowers will pay anywhere from 2—5 percent of the homes purchase price in closing costs. So for a $300,000 mortgage, a borrower can expect to pay about $5,000 to $15,000 in closing costs and that is in addition to whatever the borrower has for a down payment.
• Oftentimes, borrowers can look to closing costs to be separated into two categories: mortgage-related fees, which cover the costs of processing a mortgage application. Then there are fees related to the property itself. Those expenses involve the evaluation of the property a borrower is financing.

Fees can vary, so borrowers should discuss all that is included in closing costs up front.

Some of the fees borrowers may expect are:

• Appraisal fee: This is a fee paid by the borrower so that a licensed appraiser can determine a home’s worth so a lender can make an offer.
• Home inspection fee: This fee is separate from an appraisal fee. This is a thorough inspection done by a professional and many lenders recommend it.
• Title search: If a borrower is buying a home that is not new, a title search is done to search property records to ensure there aren’t any problems with ownership or any kind of lien on the property.
• Title insurance: Lenders will require title insurance because it protects them in case there are issues with ownership that arise despite a title search. A borrower can also choose to purchase title insurance for themselves.
• Fees related to the mortgage
• Credit report fee: This is the fee paid by the borrower so that the lender can check their credit score and obtain a credit report.
• Origination fee: This is a fee lenders may charge for initiating the loan.
• Application fee: This is another fee lenders may charge for processing an application,
• Underwriting fee: This fee covers the costs associated in evaluating a mortgage. Borrowers may also need to pay charges known as points. This is a fee borrowers can pay in exchange for a lower interest rate.
• Legal fees: For most legal transactions like this, borrowers will need legal representation for closing.