Understanding Closing Costs: What to Expect

Closing costs are the fees and expenses you pay to finalize your mortgage, above and beyond the down payment. They typically range from 2% to 5% of the loan amount, which means on a $350,000 mortgage, you could pay $7,000 to $17,500 in closing costs. Understanding these costs in advance prevents sticker shock at the closing table and helps you budget accurately.

Lender Fees

These are charges from the company originating your mortgage:

• Origination fee: Typically 0.5% to 1% of the loan amount. This covers the lender's cost of processing your loan application. Some lenders charge a flat fee instead of a percentage.
• Application fee: A fee to process your loan application, typically $300 to $500. Not all lenders charge this.
• Underwriting fee: The cost for the underwriter to review and approve your loan, usually $400 to $800.
• Discount points: Optional prepaid interest you can buy to lower your rate. Each point costs 1% of the loan amount and typically reduces your rate by about 0.25%.

Third-Party Fees

These are services required by the lender but provided by independent companies:

• Appraisal fee: $400 to $700 for a professional appraisal to determine the home's market value. The lender requires this to ensure the home is worth the amount being lent.
• Home inspection: $300 to $500, typically paid upfront before closing. While not always required by the lender, it is strongly recommended for buyers.
• Title search and title insurance: $500 to $1,500 combined. A title search confirms the seller has clear ownership, and title insurance protects you and the lender against future claims.
• Survey fee: $300 to $600 if a property survey is required to confirm boundaries.
• Credit report fee: $30 to $50 for the lender to pull your credit history.
• Flood certification: $15 to $25 to determine if the property is in a flood zone.

Prepaid Items and Escrow

At closing, you also prepay certain recurring costs:

• Prepaid interest: Interest from your closing date through the end of that month. If you close on March 10th, you pay 21 days of interest.
• Homeowners insurance: Your first year's premium is typically paid upfront at closing.
• Property tax escrow: Lenders usually require you to deposit 2 to 6 months of property taxes into an escrow account.
• Insurance escrow: Similarly, 2 to 3 months of homeowners insurance premiums are deposited into escrow.

Government Fees

• Recording fees: The county charges $50 to $250 to record the new deed and mortgage in public records.
• Transfer taxes: Some states and municipalities charge a tax when property changes hands, which can be significant in high-tax areas.

Strategies to Reduce Closing Costs

Closing costs are partially negotiable and partially avoidable:

1. Shop multiple lenders: Fees vary significantly between lenders. Comparing Loan Estimates from at least three lenders is the single most effective way to reduce costs.
2. Negotiate seller concessions: In many markets, you can negotiate for the seller to pay a portion of your closing costs, typically 2% to 6% of the purchase price depending on the loan type.
3. Ask about lender credits: Some lenders offer credits that offset closing costs in exchange for a slightly higher interest rate. This makes sense if you plan to refinance or sell within a few years.
4. Close at the end of the month: Since prepaid interest is calculated from your closing date to month-end, closing on the 28th means you prepay only 2 to 3 days of interest instead of 20+.
5. Shop for third-party services: You have the right to choose your own title company, home inspector, and insurance provider. Getting competitive quotes can save hundreds.

Who Pays What?

Closing cost responsibility is split between buyer and seller, though the exact division varies by local custom and negotiation:

• Buyers typically pay: Lender fees, appraisal, inspection, prepaid items, and the buyer's title insurance policy.
• Sellers typically pay: Real estate agent commissions (the largest single expense at closing), owner's title insurance, and transfer taxes in some areas.

For a detailed estimate of the closing costs you can expect on your specific transaction, reach out to the team at Home Financial Group. They provide transparent Loan Estimates so you know exactly what to expect before you get to the closing table.