Getting a Home Mortgage: Closing Costs and Other Fees

Most people understand how interest rates affect the cost of a home mortgage, but closing costs are a bit more of a mystery. Many first time homebuyers know that they’ll have to bring a check to cover the “closing costs,” when they sign the papers to close on their mortgage. But not everyone understands exactly what’s included in those costs. Even those who have gone through the process don’t always understand what the closing costs are and why they are paying them. Here are some of the closing costs and fees that you may have to cover when you buy a new house or refinance your mortgage.

Loan Origination Fees

Loan origination fees pay the lender for preparing and submitting the proposed loan, as well as for evaluating it and approving it. While some lenders offer a flat loan origination fee, most banks and lenders express the loan origination fee as a percentage of the total loan amount.

Points

Points are another fee that can be confusing to first-time home buyers. Simply put, points are a way to pay some of the interest on your loan up front, and thereby lower the interest rate on your loan. Lenders set their own price for points, but in general, each point that you pay will lower your interest about one-eighth of a percentage point and cost about $1,000 for every $100,000 of your loan. Points can be a good idea if you plan to live in the home you’re buying for a long time. If you plan to move within a few years, you won’t recover the cost of the points and you’re better off paying the interest on the loan.

Appraisal Fee

Before a lender will approve a mortgage, they require an independent appraiser to make a valuation of that home. The cost of the appraisal will be tacked onto your closing costs — usually between $100 and $400. You may also have to pay a survey fee to establish the boundaries of the property on which the house sits.

Application Fee

Most lenders charge an application fee when you apply for a mortgage, though a few notably do not. That application fee generally must be paid at the time you submit your application. Many lenders will apply your application fee to your closing costs. If you pay a $100 application fee, your closing costs may be reduced by $100.

Title Search and Title Insurance

Before approving your mortgage, lenders also require a title search and title insurance. A title search firm will research the history of the house you want to buy to make sure that the title to it is “clear” — that there are no outstanding liens or encumbrances that might impact the ownership of your home. Even a thorough title search, though, may miss some bizarre happenstance that could affect your home ownership. In that case, title insurance will pay any expenses related to fighting a claim against your title, or pay off your mortgage so that you are free to buy another house.

Credit Report Fee

The bank or lender will charge you the cost of getting your credit report, generally $40 to $50.

Recording and Transfer Fees

You may be charged a small fee for the cost of recording the sale with the county clerk’s office and other legal fees related to the transfer. In addition, you may have to pay a document stamp tax of about 35 cents per $100 of loan amount.

Prepaid Property Taxes and Escrow

The lender may require that you establish an escrow account that will hold premiums for things like homeowner’s insurance, private mortgage insurance and property taxes. These insurance policies and prepaid property taxes protect the lender from losing the house if you fail to insure it or pay taxes properly.

In addition, you will have to pay an attorney fee — generally $300-$500 — for your attorney to review the loan documents and represent you, and interim interest, the amount of interest due on the loan from the closing date to the end of the month.

All of these closing costs should be listed in detail in your closing papers so that you know exactly what you are paying in fees and charges. They should also be detailed in the official Good Faith Estimate that you receive before the loan closing. Some lenders will be willing to negotiate some of these costs and fees, or even waive them entirely.

For financial planning purposes, it’s important to understand all of the costs and fees of closing a mortgage. Buying a home is expensive, so every step you can take to plan for the future matters.