Understand Mortgage Closing Costs

Closing costs are the fees and expenses you need to pay when finalizing a mortgage loan. These costs are separate from your down payment and are typically paid at the time of closing, when the property ownership is transferred to you.

Common Mortgage Lender and Title Company Closing Costs

Here are some common mortgage lender and title company closing costs you might encounter:

• Loan origination fees: These fees cover the administrative costs associated with processing your mortgage application.
• Appraisal fee: Lenders usually require an appraisal to determine the value of the property. The appraisal fee covers the cost of hiring a professional appraiser.
• Title insurance: This insurance protects both you and the lender in case there are any issues with the property’s title, such as liens or ownership disputes.
• Mortgage insurance: If your down payment is less than 20% of the home’s purchase price, you may be required to pay mortgage insurance. This protects the lender in case you default on the loan.
• Escrow fees: These fees cover the cost of setting up an escrow account, where funds for property taxes and homeowners insurance are held until they are due.
• Recording fees: When the property sale is finalized, the new deed and mortgage documents need to be recorded with the county. Recording fees cover the cost of this process.
• Prepaid expenses: At closing, you may need to prepay certain expenses such as property taxes, homeowner’s insurance premiums, or prepaid interest. While these are not hidden costs, they can increase the amount you need to pay upfront.

Closing costs can vary depending on factors such as the loan amount, location, and lender. Typically, closing costs can range from 2% to 5% of the loan amount. You should receive a Loan Estimate from your lender, which provides an itemized breakdown of the estimated closing costs, within three business days of submitting your mortgage application. Continue reading for a more detailed breakdown of various mortgage loan closing costs.

What are Bank Mortgage Closing Costs?

Bank mortgage closing costs typically refer to the fees and expenses charged by the bank or lending institution when finalizing a mortgage loan. These costs can vary depending on the specific lender and loan program, but here are some common bank mortgage closing costs:

• Loan origination fee: This fee covers the administrative costs associated with processing your mortgage application and establishing the loan. It is usually a percentage of the loan amount.
• Discount points: Banks may offer the option to pay discount points to lower your mortgage interest rate. Each point is equal to 1% of the loan amount and can be paid upfront at closing. Discount points might be income tax deductible, but consult an accountant or tax preparer to determine if that applies to your financial situation.
• Application or Processing or Underwriting fee: Some banks may charge these fees to cover the costs of processing and underwriting your mortgage application.
• Credit report fee: Banks pull your credit report to assess your creditworthiness and determine the terms of your loan. This fee covers the cost of obtaining your credit report.
• Appraisal fee: A bank typically requires an appraisal report to determine the market value of the property. The appraisal fee covers the cost of hiring a professional state licensed appraiser.
• Survey fee: Banks may require a survey of the property to verify its boundaries and identify any potential issues. The survey fee covers the cost of hiring a licensed surveyor.

These are general examples and the specific closing costs charged by banks can vary. Obtain a Loan Estimate from your bank, which provides an itemized breakdown of the estimated closing cost.

What are Title Company Costs for a Mortgage Closing?

When it comes to mortgage closing, title companies play a crucial role in facilitating the transfer of property ownership. They perform various tasks to ensure a smooth and legally sound transaction. Here are some common title company costs associated with a mortgage closing:

• Title search fee: The title company conducts a thorough search of public records to examine the property’s title history and identify any potential issues or claims. The fee covers the cost of performing this search.
• Title examination fee: After the title search, the title company examines the search results to verify the property’s ownership, check for outstanding liens, judgments, or other encumbrances. The fee is for the title company’s professional examination and analysis of the title report.
• Title insurance premiums: Title insurance protects both the lender (lender’s title insurance) and the buyer (owner’s title insurance) against any future claims or defects in the title. The cost of title insurance premiums is typically based on the loan amount or the purchase price of the property.
• Settlement or closing fee: The title company charges a fee for handling the closing process, coordinating with all parties involved, preparing the necessary documents, and disbursing funds. This fee covers their services as the neutral third party overseeing the closing.
• Document preparation fees: The title company may charge a fee for preparing the necessary legal documents, including the deed, mortgage documents, and other closing forms.
• Notary fees: A notary public is often required to witness the signing of the closing documents. The title company may charge a fee for providing a notary or for notarizing the documents.
• Courier or Wire transfer fees: If funds need to be wired between the parties involved, the title company may charge a fee to cover the cost of the wire transfer.
• Recording fees: The title company typically handles the recording of the new deed and mortgage documents with the appropriate county or jurisdiction. The recording fees cover the cost of filing these documents.
• Transfer or Recordation taxes: Some jurisdictions may charge a fee (basically a sales tax) for transferring or selling a property from one entity to another. The amounts may differ based on location and purchase price.

Specific costs and fees associated with a title company can vary depending on the location, purchase price, loan amount, complexity of the transaction, and the title company itself. Request a detailed breakdown of the title company’s charges in advance, review them carefully, and ask for clarification on any items you do not understand.

Other Mortgage Loan Costs

Depending on the property, location, and program type there may be additional costs associated with a mortgage closing. Some of these costs might include:

• Home inspection fee: While not always required, a home inspection is highly recommended to identify any potential issues with the property. The inspection fee covers the cost of hiring a licensed inspector.
• Termite inspection: Depending on the loan program and location you may be required to obtain a termite inspection to ensure structural integrity of the property.
• Condo questionnaire: If you are purchasing a condominium, a condo questionnaire may be required by the lender to determine if the property meets required program guidelines. Condo management companies might charge a fee to fill out a condo questionnaire and send it back to the lender.
• Homeowners association (HOA) fees: If you are purchasing a property in a community with an HOA, you may be required to pay initiation fees or prorated HOA dues at closing. Make sure to inquire about these costs upfront.
• Attorney fees: If you choose to hire an attorney to review the closing documents or represent you during the closing process, their fees will be included in the closing costs.
• Realtor admin fee: Some real estate agencies might charge purchasers an administrative fee to cover their costs.

These are just some examples of various costs associated with a mortgage loan transaction. Depending on the location, property, and loan program, there may be additional fees not listed in this article.

Mortgage Loan Prepaid Closing Expenses

Mortgage loan prepaid closing expenses are costs that you need to pay upfront at the time of closing, covering various expenses related to your mortgage loan and property. These expenses typically include:

1. Property Taxes: Depending on the timing of your closing and the property tax payment schedule, you may need to prepay a portion of the property taxes. This ensures that the property taxes are covered for the period until the next tax payment is due.
2. Homeowners Insurance: Lenders typically require you to have homeowner’s insurance to protect the property against damage or loss. You may need to prepay the first year’s insurance premium at closing to ensure coverage is in place.
3. Mortgage Interest: Mortgage interest is typically paid in arrears. However, at closing, you may need to prepay the interest from the closing date until the end of the month. This ensures that the interest is paid up until the first full month of your mortgage.
4. Mortgage Insurance Premiums: If your down payment is less than 20% of the purchase price, you may be required to pay for private mortgage insurance (PMI). This is an insurance premium that protects the lender in case of default. PMI premiums are often paid upfront at closing or added to your monthly mortgage payment.
5. Escrow Account deposit: Lenders may require you to establish an escrow account to hold funds for future payments for property taxes and homeowner’s insurance. At closing, you may need to deposit a portion of these expenses into this account to ensure it has sufficient funds to cover these future payments. Funds deposited into the escrow account are managed by the lender, but belong to the borrower and you should get a detail account of the balance on the monthly mortgage statement.

Prepaid expenses can vary depending on factors such as the property location, loan terms, and lender requirements. The exact amounts will be outlined in the Loan Estimate and Closing Disclosure provided by your lender, which detail the estimated costs associated with your mortgage loan.

Are there any Hidden Costs?

All the loan costs should be listed on the Loan Estimate and while there should not be any hidden costs associated with mortgage closing, it is important to be aware of potential additional expenses that may arise during the process. These are not necessarily hidden costs but factors that can impact your overall expenses.

To avoid surprises, carefully review all the documents provided by the lender and ask questions about any fees or expenses you are unsure about. Transparency is key and reputable lenders should be willing to provide clear and detailed information regarding all costs associated with your mortgage. Reading and understanding all the documents you receive during the closing process will ensure that you have a comprehensive understanding of your financial obligations.

If you have any specific concerns or questions about potential hidden costs, it is best to consult with your lender or a qualified mortgage professional who can provide personalized guidance based on your situation.

Do I need to pay Closing Costs?

Yes, typically, as a borrower, you are responsible for paying closing costs when finalizing a mortgage loan. While closing costs are typically the borrower’s responsibility, there may be situations where you can negotiate with the seller or lender to have them contribute towards the closing costs. This can be done through negotiation or by opting for certain loan programs that offer seller concessions or lender credits. However, it ultimately depends on the specific terms of your purchase agreement and loan program.

Can Mortgage Closing Costs be rolled into the Loan?

Yes, it is possible to roll mortgage closing costs into the loan, but it depends on the specific circumstances and loan program. This option is known as “financing the closing costs” or “including the closing costs in the loan amount.” Here are a few points to consider:

• Loan program eligibility: Some loan programs may allow you to finance the closing costs, while others may have restrictions or limitations. Check with your lender to see if this option is available with your chosen loan program.
• Loan-to-value (LTV) ratio: The lender will consider the loan-to-value ratio, which is the loan amount compared to the appraised value of the property. Including closing costs in the loan amount can affect the LTV ratio, and lenders typically have maximum LTV limits for different loan programs.
• Increased loan amount and costs: Rolling closing costs into the loan means you will be borrowing a larger amount, which can result in an increase in your monthly mortgage payment. Additionally, you will be paying interest on the financed closing costs over the life of the loan, which can increase the overall cost of the mortgage.
• Lender requirements: The lender may have specific guidelines regarding the amount of closing costs that can be rolled into the loan. They may also require certain documentation or verification of the closing costs being financed.

Financing the closing costs can be a viable option for borrowers who prefer to conserve their available cash or face challenges in covering the upfront closing costs, but you need to carefully evaluate the long-term financial implications and consider whether the benefits outweigh the costs.

Discussing this option with your lender and reviewing the loan terms and disclosures will help you understand the impact on your loan amount, monthly payment, and overall cost of the mortgage.

Can Mortgage Closing be Free of Costs?

The basic answer is no – there are always costs associated with a mortgage loan, but there are some instances where you may come across programs or promotions that offer reduced or no closing costs to the borrower. Here are a few potential scenarios:

1. Lender-paid closing costs: Some lenders may offer to pay for certain closing costs as an incentive to attract borrowers. However, keep in mind that this is not entirely “free” as the costs are typically incorporated into the loan by slightly increasing the interest rate or adding them to the loan balance.
2. Seller concessions: In certain real estate transactions, the seller may agree to contribute towards the buyer’s closing costs as part of the negotiation. This can help reduce the upfront expenses for the buyer.
3. Grants or assistance programs: There are various grants and assistance programs available at local, state, or federal levels that can help eligible homebuyers with closing costs. These programs often have specific requirements and limitations, so it is important to research them and determine if you qualify.
4. Refinance options: If you already have a mortgage, refinancing your loan may present an opportunity to roll some or all of the closing costs into the new loan. This can help reduce the immediate out-of-pocket expenses.

Please note that even in these scenarios, there may still be some costs associated with the mortgage closing, such as prepaid expenses (e.g., property taxes, insurance), appraisal fees, and other third-party fees.

Final Thoughts

It is important to budget for closing costs as they can be a significant amount, typically ranging from 2% to 5% of the loan amount. You should receive a Loan Estimate from your lender within three business days of submitting your mortgage application. This document will provide an itemized breakdown of the estimated closing costs, allowing you to understand and prepare for the expenses involved. Discuss the closing costs with your lender, review the Loan Estimate carefully, and ask any questions you may have to ensure you have a clear understanding of the expenses involved in finalizing your mortgage loan.

When exploring options for reduced or no closing costs, carefully study the terms and conditions, as there may be trade-offs or potential long-term implications. Explore different loan programs and evaluate the costs and benefits to make an informed decision that aligns with your financial goals.

Please reach out to me with questions regarding closing costs and additional guidance at 312-296-4175 or email me at connect@borislending.com. I lend in all 50 states and I am never too busy for your referrals!!