Many people dream of buying their first home, but they discover during the process how expensive it can be. And it is not just about the price of the home and the down payment. Mortgage closing costs and lending fees can add up to two to five percent of the total purchase price. Then on top of it, if you have to worry about mortgage insurance or PMI if you put down less than 20%.
To help you prepare for the costs of buying your home, below is what you need to know about these extra costs of closing your home loan.
Overview of Closing Costs and Lending Fees
You might think that paying two or five percent of the cost of the loan in closing costs and fees is not a lot. But remember that the average home price today is north of $200,000. You can easily pay $5,000 to $10,000 in closing costs on your home loan.
1. Pre-Paid Costs
These are the expenses that you need to pay all the time as a home-owner. When you close the home loan, some of the costs are due up front. Prepaid closing costs should be in the same amount no matter which lender is doing your loan. For example, you will need to pay a certain amount of real estate taxes up front, as well as homeowner’s insurance costs and the amount of money that must be deposited into the escrow account per federal and state law.
2. Prepaid costs include:
- Interest: When you close on the loan, you will pay interest that is prorated from the date of closing to the first of the next month. Many people like to close at the end of the month because it reduces the interest that accrues before you make your first payment.
- Insurance: Home owner’s insurance is the one that most people think about. The annual premium must be paid when you close. Most lenders on first mortgages require that 1/6 of the yearly premium be collected and put in escrow. But do not forget about PMI – if you have less than 20% down, you must pay the first month’s PMI.
3. Lender Fees
You also have to pay your lender a lot of one-time fees, which can include:
- Discount points
- Origination points
- Application fees
- Processing fee
- Credit report fee
- Appraisal fee
- Survey fee
- Tax service fee
- Administration fee
- Wire transfer fee
- PMI application fee
- Commitment fee to lock in rate
- Inspection fee
All of these fees can be confusing and overwhelming, and some lenders make it intentionally so. For example, the lender may say it does not charge you an application fee, but it will make up for that by charging a commitment fee or doc prep fee when you close. It is worth looking closely at all of these fees that the lender charges and determining if you can save money by going with another company.
4. Title and Attorney Fees
Below are some of the fees you must pay to the title company or real estate attorney:
- Recording and government filing fee: All of the information about your property must be filed at the courthouse in your county or city. These fees will include the cost of recording that you own the property, and also regarding transferring taxes and all related documents to your name. This fee is usually based upon the number of pages that are recorded.
- Notary fee: This is the cost of having the mortgage deed of trust notarized.
- Title insurance: This covers you if the seller does not have clear title to the home. This may be a fee of up to $1000.
- Escrow/settlement/closing fee: You must pay for the services of the escrow professional who does the closing. This is usually at least $150.
5. Escrow Account
The escrow account on your home will include the insurance and taxes that are part of the mortgage payment each month. In most cases, the mortgage lender pays your homeowners insurance and property taxes for you once or twice per year. So, you will have an escrow payment on top of your mortgage payment. This means you are paying extra every month, so you do not have to worry about saving that money and paying it at the end of the year.
The Bottom Line on Mortgage Closing Costs, Fees and Penalties
There is no doubt that all of the closing costs and fees associated with buying a home can add up to a lot of money. How much these costs will be depending mostly on your state of residence and how much the home is. Just be prepared to pay thousands in closing costs when you buy. That is why it can be so helpful to get a low-down payment mortgage such as through FHA or a no down payment home loan from the USDA or VA. That way you have the money to pay the closing costs.
You also can wrap a lot of the closing costs into the mortgage in some cases, but this will cause you to pay more interest over the years. Still, this option can be preferable to continuing to rent for years longer.