Closing costs can be rolled into your home mortgage loan. Understanding them can help you negotiate the price of the home you are purchasing.
Get home loans quotes
Below, LendingTree will explain the cost of a mortgage, including closing costs. We’ll help you understand how to differentiate PMI from PITI, understand origination and discount points, and learn about escrow.
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.
There’s a widespread belief that all closing costs are deductible when filing federal taxes. That’s untrue for most, but there are exceptions — and they can be big ones.
The IRS says the following may be deducted by those who itemize their deductions:
To deduct any of these costs, you have to itemize your deductions on a Schedule A. If you take the standard deduction, you cannot deduct closing costs or interest expense.
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.