How to Prepare for Mortgage Closing Costs
Closing costs are the various fees paid after an offer on a home has been accepted and before ownership of the house can be transferred from the seller to the buyer. These fees can vary from one purchase to another, which can make it harder to budget for them in advance. Sometimes, a buyer can negotiate a reduction or exemption from certain closing costs or ask that some fees be covered by the seller. Of course, everything regarding fees and closing costs needs to be documented in writing.
Buyers should plan for the fees below:
Lenders charge fees for various steps involved with a mortgage loan.
- Loan origination fee: This fee covers the lender’s administrative costs associated with creating a mortgage—usually around one percent of the total value of the loan.
- Appraisal fee: Lenders will often require an appraiser to assess the property being purchased to ensure the loan value matches the home’s market value. This can cost between $300 and $500.
- Home inspection fee: For certain types of mortgages, particularly involving brand new homes, an independent home inspector must be hired to determine if there are any significant issues in the structure of the home that may pose health or safety risks. This is a separate process from the appraisal, with fees that average between $200 and $400.
- Application fee: Depending on the lender, the buyer may be required to pay an application fee averaging between $300 and $500.
The title to a property is the official record of ownership that must be transferred from the seller to the buyer before completing the transaction. While this may seem like a formality, there is real risk involved in this process—the new owner of the title could become responsible for any unpaid debts or liens placed on the home by a previous owner. To prevent these issues from surfacing, buyers may need to pay various fees related to inspection and approval of the title.
- Title insurance is often required by mortgage lenders. It serves to protect the lender and homebuyers because it provides a certification that the title is free of debts or liens. This may cost around one-half of one percent of the home’s purchase price.
- A public official may serve as a legal witness to the transferring of a title. Notary fees, which are usually small, and may be waived in certain cases.
- Some states require the title inspection and closing process to be overseen by an attorney. Fees for their services vary and are usually charged at an hourly rate.
Discount points are a common, yet optional, type of closing fee that may allow the buyer to reduce their monthly payments or even reduce overall closing costs. If the buyer purchases discount points (often referred to as "points"), the lender may lower the annual percentage rate charged as interest on repayment. Each point is usually equal to one percent of the total loan amount. The amount that points will reduce the interest rate depends on the rate of the loan, as well as any restrictions from the lender.
Points can work in the opposite direction, too. Some lenders offer “rebate points” to reduce the amount borrowers pay on some of the closing costs in exchange for a higher interest rate, and thus higher monthly payments over the life of the loan. This could help buyers who find themselves short on cash towards the end of the purchase process. Keep in mind that this could significantly increase the total amount paid over the life of the mortgage loan.
The laundry list of expenses doesn’t end with the mortgage and title. Soon-to-be homeowners must ensure they take care of other necessary expenses too, like obtaining homeowner’s insurance and any taxes owed at closing. Then there is the cost of moving to consider—which is more or less unavoidable in any real estate transaction.
Again, different lenders may charge different fees at closing and may also offer different options for how they are paid. Our team of mortgage professionals can help guide you through every step of the home buying process. Contact your local Trustmark mortgage associate today to learn more.