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Closing Costs

Closing costs – what are they?

Closing costs are a part of every home loan. That is a fact that cannot be avoided. Closing costs must be paid by both the buyer and the seller. Some of these expenses, such as real estate agent commissions, appraisal fees, and inspection fees, are expected. However, there are costs in mortgage loans that you may not be aware of, particularly if you're a first-time home buyer.

Let’s take a closer look and eliminate any surprises!

Aside from the down payment and monthly payback costs, there are typically other fees associated with securing a mortgage, which aren't usually obvious. We'll look at some of these "hidden charges" below to help you save money and prepare for your house purchase.

Closing costs, often known as mortgage fees, are fees that are added to the purchase price of a home. When you buy a house or refinance an existing loan, you'll have to pay these costs.

These closing costs aren't supposed to be hidden by law; you should get a breakdown of fees in the loan estimate when you apply for a mortgage, as well as a closing disclosure statement from the lender before the closing. As a result, a wise buyer would carefully study these costs and direct any questions they may have to their lender.

Paying the entire amount as a one-time expense is one option to cover your closing fees. If your lender allows it, you can roll these costs into the loan, but you'll wind up paying more in interest over the term of the loan.

Homebuyers pay an average of $5,749 in closing expenses and taxes, according to real estate firm ClosingCorp. Fees, on the other hand, vary widely based on your state, lender, loan type, and creditworthiness. Some lenders charge more than others, so it’s good to shop around for a loan based on more than just the best interest rate.

“It’s important to shop around for a lender who fits your needs. A low interest rate is great, unless there are a ton of fees “hidden” in the loan. Ask each lender for the rate, fees, and closing costs associated with their loan.” Derek Kramer, Mortgage Loan Officer, BANK

The following are the most common charges you will encounter.

1. Appraisal and inspection fees

A lender must confirm that the amount you seek to borrow is equal to the property's value. This tells the lender if it will be able to recoup its investment if you default on the loan. The process may cost you roughly $350 because it necessitates the services of a trained appraiser.

A home inspection is not required by most lenders to ensure that the house is structurally sound and suitable for habitation, but is generally a good idea. You can choose to back out of the contract or negotiate a reduced price depending on the severity of the results.

2. Application fee

The step of starting a house loan isn't free with most lenders. This fee often covers the processing of your mortgage application, credit checks, and other administrative costs.

The cost itself varies by lender and can range from $50 to $500. If you do your homework, you may be able to persuade lenders to waive the cost through negotiation or by presenting them with quotes from competitors.

3. Legal fees

Lawyers can address legal difficulties that may emerge throughout the house buying process, in addition to compiling and reviewing documentation. For aiding on a real estate transaction, some lawyers charge $150 to $350 per hour, while others charge a flat fee of $500 to $2,000.

4. Daily interest prepaid

This covers any pro-rata interest on your mortgage that is expected to accumulate between the closing date and your first monthly payment. The amount of interest you pay is determined by the overall loan amount as well as your mortgage rate.

5. Loan origination fee

The origination charge, also known as the underwriting fee, pays a lender's administrative costs associated with producing your mortgage documentation and analyzing your application. The lender's attorney and notary fees may also be covered.

The cost is normally 0.5 percent to 1.0 percent of the loan amount, so for a $300,000 house loan, you may anticipate spending between $1,500 and $3,000. Some banks don't impose origination fees at all, but to recoup their costs, they'll likely demand a higher rate.

6. Escrow or reserve account costs

As part of the mortgage agreement, some banks may request you to place a few months' worth of spending into an escrow fund, sometimes known as prepaids. Your escrow funds are held in a special account that the lender uses to make payments on your behalf.

At closing, lenders often require borrowers to pay two months' worth of property tax and mortgage insurance payments.

7. Mortgage insurance purchased privately (PMI)

If you have a down payment of less than 20% on a 15- or 30-year fixed-rate loan, you will additionally need to pay for private mortgage insurance (PMI). Just keep in mind that PMI only protects the lender if you default, not your home in the event of a tragedy.

If you have a down payment of less than 10% on an FHA loan, your closing expenses will include an upfront mortgage insurance fee (MIP). Over the term of the loan, you'll additionally have to pay a monthly MIP cost.

8. Homeowners insurance

Homeowners insurance, on the other hand, will compensate you if your home is damaged as a result of unforeseen or catastrophic circumstances.

It's also known as a HO-3 policy, and it covers the cost of repairing your home and belongings in the event of a fire, theft, or vandalism. It also includes liability coverage in the event that a guest is injured on your premises.

Borrowers are usually required to pay a year's worth of home insurance up front by lenders. For every $100,000 in property worth, you may anticipate paying roughly $35 each month.

9. Property taxes 

You pay these fees to your state government in exchange for public services such as fire departments, highways, and public schools. The amount a homeowner pays each year is mostly determined by the assessed value of their home and local tax rates.

Property taxes are usually rolled into your monthly mortgage bill and deposited into your escrow account by lenders. In the event of a foreclosure, this shields the lenders from having to pay the remaining property tax.

You will be requested to pay a third-party fee for tax monitoring services if you do not do so. These will keep track of your property tax payments and notify your lender if any are missed or late.

10. Title search fees

A title search, which is usually undertaken by real estate lawyers or title insurance companies, informs the lender and buyer of any outstanding claims or liens against the property.

Unpaid taxes and bankruptcies, for example, may indicate that the seller does not technically own the home they're selling.

A title search can be time-consuming, especially in areas where real estate records aren't digital. Your mortgage closing expenses will likely increase by $300 to $400 because of this.

The closing costs of a mortgage includes many fees. Some of these are the appraisal fee, legal fees, title fees, and others which are set by outside entities and not controlled by the lender.

Some expenses are unavoidable. The expenses of appraisals, government fees, taxes, and courier fees are all fixed. Other costs, on the other hand, have some leeway. By shopping around or working with your agent and lender to reduce these fees, you can lower your entire mortgage closing costs.

Ready to apply for your mortgage? Simply click here and submit your application. One of our friendly mortgage experts will be in touch with you to walk you through the process and will gladly explain the fees you will encounter at BANK.