How much are closing costs?
Closing costs are upfront costs you are charged to get your loan and to transfer ownership of the property. Closing cost for a mortgage in the U.S. typically range from 2% to 6% of your mortgage loan amount. For example, if your mortgage loan amount is $200,000, then your closing costs typically would range from $4,000 to $12,000. Closing costs vary widely based on where you live, the type of mortgage you are seeking, and other factors. You may be able to reduce closing costs by intelligent preparation for and navigation through the loan process. You may also be able to reduce the cash you need to close (settle) by negotiating lender or seller credits.
What are closing costs?
Closing costs include all expenses that must be paid at closing (settlement). Mortgage closing costs may include:
- lender fees to cover the cost of providing and processing the new mortgage;
- prepayment penalty, if any, associated with your old mortgage, in a refinance;
- fees for third party services that you shop for;
- fees for third party services that you cannot shop for; and
- state and local government charges.
Third party services that may be required for closing, may include, but are not limited to:
- credit report
- pest inspection
- flood determination and monitoring
- tax status research and monitoring
- title - search, insurance binder, lender's policy
- settlement agent
What determines how much closing costs are?
- competition - lots of competition between lenders should mean you have plenty of low cost options to choose from;
- market conditions - closing costs can be affected by local factors such as property taxes;
- loan type - for example, FHA loans may require upfront mortgage insurance while VA loans may require a funding fee; and
- loan purpose - lenders will generally charge higher origination fees for more complex and risky mortgages. For example, in a foreclosure bailout a lender may be making a substantial investment in time and resources to get the loan to closing and risk the new loan not closing due to actions of other parties or the original lender;
Who determines your closing costs?
Several people/organizations can have a role in determining your closing costs, including:
- your loan officer may have the ability to set some of the closing costs especially the loan origination fee. The loan officer may also select the required third party service providers from an approved list;
- your lender;
- state and local government; and
- third party providers.
How can I reduce closing costs for my mortgage?
- prepare, well in advance, to qualify for the best mortgage possible since this will put you in a stronger negotiating position.
- if you are serving or have served in the military, consider what benefits you are entitled to. You may qualify for a VA loan and/or funds to help you purchase a home.
- compare written loan estimates from multiple lenders and look for the best overall deal. Look for a loyalty program at your current bank. Some banks offer their customers lower closing costs if they close a mortgage with them. Pay close attention to the origination charges which are upfront fees charged by the lender. Origination charges may include application fees, origination fees, processing fees, rate-lock fees, underwriting fees, verification fees. The total amount is what is important.
- negotiate with lenders for a better deal. Your loan officer may be paid on a commission basis. If the costs are too high you can always walk away from the loan. The loan officer and the lender may prefer to close a loan at a reduced cost to losing your business to a competitor.
- compare quotes for third party services that you can shop for. They may include services like title insurance, pest inspection and survey. These services will be listed on your Loan Estimate. The lender should also provide you with a list of approved providers. You should check first with your lender about any provider not on their list.
- Close at the end the month. This will reduce the amount of per diem interest you will be required to pay.
- Compare your Closing Disclosure to your Loan Estimate and ask your lender to explain each line item and any changes.
How should I pay for closing costs?
In a refinance, either the borrower or the lender may pay for closing costs. If the lender pays for closing costs they will likely increase the loan amount and/or increase the interest rate. Both scenarios result in you paying more money over time. A closing cost calculator can help you decide how to pay for closing costs.
If you buy a home you will usually pay all of the closing costs. However, subject to State law and the terms of the purchase contract, the seller may pay for some of these costs. If the seller gives you a credit towards your closing costs, you can expect to pay a higher price for your home. The lender may also offer you a credit to offset some of your closing costs. In exchange for that they may increase your loan amount and/or your interest rate.