Understanding Closing Costs

Many home buyers focus on just one cost, when really, there are a wide range of mortgage costs to consider when shopping for a home loan. Typically, buyers focus on getting the best mortgage rates when comparing quotes from lenders. And that’s smart…​

Using a mortgage payment calculator and some basic math, you can see that someone taking out a loan for $180,000, with a 3.5% APR loan on a $200K home is likely to pay just over $110,000 in interest over the lifetime of a 30-year fixed-rate mortgage. Anything that can be shaved off that cost is going to be welcome.

However, just because interest is by far the biggest of the various mortgage costs, that doesn’t mean you should ignore the others. Closing costs vary widely between mortgage lenders and loan programs. Typically they run from two to four percent of the home’s purchase price. In the example above, that would be $4,000 to $10,000.

Consumers who compare quotes from several lenders may be able to place themselves at the lower end of that range. There’s absolutely no reason for a buyer not to contact competing lenders and choose the loan with the lowest overall costs.

1. Appraisal fee. Paid to the professional who assesses the value of the property.

2. Attorney or title company fees. This is for escrow services when you sign the documents and complete a property purchase.

3. Credit report fee. Covers the costs of checking your credit rating.

4. Discount points. These are paid to get a lower mortgage rate.

5. Impounds. These are pre-paid property taxes and homeowners insurance. They are not a lender fee but are simply costs related to owning a home, If you borrow more than 80 percent of the purchase price, most lenders require impounds. They prorate these amounts and add them to the monthly mortgage payment. Then the lender pays your insurance premiums and taxes as they come due.

6. Inspection fees. It’s recommended that buyers have a professional inspection to make sure the home is safe and livable.

7. Loan origination fee. Charged by the lender for processing the mortgage application. It’s usually defines as a percentage of the loan amount (in this case it’s an “origination point” and not a “discount point”) but it may also be a flat fee.

8. Pest inspection fee. This determines if the property has termites or any other infestation.

9. Recording fee. Charged by the city or county for recording the ownership change for the property and the lender’s lien against it.

10. Title insurance fee. There are two policies – the buyer’s and the lender’s. The first one protects the buyer in the event that the title is not clear. The second protects the lender’s interest. If you finance a home purchase, the lender will almost certainly require that you purchase a lender’s policy.

11. Title search fees. A search is intended to uncover any encumbrances on the title, such as unpaid mortgages or tax liens.

12. Underwriting, processing, document preparation, courier fee, and more. These lender fees may be charged by the lender as separate items but are commonly wrapped into the origination. In the industry, these are called “junk fees” and they are absolutely negotiable.

Good faith estimates

Good faith estimates (GFEs) protect buyers by disclosing home loan costs when they apply for a mortgage. Lenders must provide a GFE, which lays out the basic terms and expected costs of the loan, within three working days of receiving a mortgage application. Many are willing to provide one before you actually apply, which makes shopping for your mortgage easier.

Other lenders do not issue GFE to loan shoppers. Instead, they provide a “worksheet” or “scenario.” There is nothing wrong with this, but you should be aware that only an actual GFE provides certain protections.

Lenders must issue a new GFEs any time there is a “material” change in your application (for example, you applied for a 30-year fixed loan but then switched to a 5/1 ARM). Your actual closing costs must essentially match the final GFE.

Closing costs are divided into three categories – those which cannot vary from what was disclosed at all (most lender fees fall in this one), those that can come in higher but within certain limits (most of these are services from lender-selected providers), and those that can change by any amount (those are mostly costs from providers chosen by the borrower). We explain more about this in our article: the mortgage closing process explained.

Additional resources

Here are some additional resources to help you better understand the mortgage costs and closing costs.

Who pays closing costs and how?
Understanding closing costs
Can you negotiate mortgage closing costs?