Understanding Mortgage Closing Costs

Mortgage closing costs are fees, points and other charges that home buyers, home sellers and homeowners pay when they purchase or sell a home or refinance a mortgage.

Examples of general costs include:

  • Escrow, attorney or settlement company charges
  • Owner's title search and title insurance
  • Document or title recording fees
  • Realty brokerage commissions, typically paid by sellers
  • Termite and other inspection charges

Examples of mortgage-specific costs include:

  • Credit report fee
  • Appraisal fee
  • Loan origination fee
  • Discount points to lower, or buy-down, an interest rate
  • Prepaid mortgage insurance or upfront funding fee
  • Lender's title search and title insurance
  • Prepaid mortgage interest

Mortgage costs might also include prepaid property taxes and homeowner's insurance if the loan features an escrow or impound account that the lender uses to pay these costs on the borrower's behalf.

Some costs must be paid in full at closing. Others can be financed into the new mortgage and paid over the term of the loan. The specific amounts of costs vary, depending on the location, type of loan, property type and other factors.

Good Faith Estimate

Lenders are required to provide an estimate of mortgage closing costs within three days once a consumer applies for a loan. This estimate, known as a Good Faith Estimate, or GFE, is required by the federal government. It offers borrowers a preview of their settlement charges and an opportunity to shop around and compare mortgage costs from different lenders and companies that provide settlement services.

The purpose of the GFE is to protect borrowers from surprises at closing, though the final costs might not be identical to the estimated costs.

As the form's name implies, the mortgage costs and other closing costs shown on a GFE are only an estimate. Some costs won't change. Others may vary from when the GFE is prepared to when the loan closes. Read the form carefully to understand which costs can vary and which can't.

Closing

Borrowers should compare the final costs to the GFE and question any expenses that weren't disclosed or exceed the allowable variances. Page three of the Settlement Statement, or HUD-1, contains a section comparing charges listed on the GFE to the actual charges, and indicating how much discrepancy there can (or cannot be) by law. If the difference between the estimated and actual charges exceeds what's allowed by federal law, the lender must issue a refund to the borrower.

Closing costs that aren't financed are typically paid with a cashier's check or bank check at closing. A personal check might not be acceptable, so it's smart to plan ahead and find out not only the amount, but also the form of payment that will be required.

Who Pays?

Who is responsible for which closing costs? That's determined by what's on the purchase agreement between the buyer and seller. Some costs are usually paid by buyers. Others are usually paid by sellers. Who pays which costs varies by local custom and is always a matter of negotiation between the buyer and seller.

It is possible to purchase a home with no out-of-pocket mortgage costs or closing costs if the costs are financed as part of the loan amount, paid by the seller, or built into a slightly higher interest rate for the loan.

Borrowers who have questions or concerns about the costs to buy a home or refinance a mortgage should ask their real estate broker, lender or escrow officer for more information.

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