A Guide to Home Buying Closing Costs
Buying a home involves two major costs to the buyer: the down payment and closing costs. When you begin the loan application process, the law requires the lender to provide a Good Faith Estimate (GFE), which estimates closing costs and includes both bank charges and third-party fees. A better understanding of closing fees can save you money.
Closing costs typically range from one to five percent of the loan amount and will vary based on the type of mortgage, and the location of the property.
When Do You Pay Closing Costs?
After signing the purchase agreement to buy a home, you then submit a deposit to the real estate agent which will remain in escrow until closing. The deposit counts towards the funds needed for closing. If the deal falls through you risk losing the deposit.
When the loan closes, the escrow company subtracts seller-paid fees and lender credits for the total amount due. You pay the remaining balance, which will include both the down payment and the closing costs.
Closing costs include numerous fees from the bank and third-party vendors. Table 1 estimates lender closing fees common on home loans. Estimates based on a $250,000 loan.
Origination Fee provides compensation to the lender for processing the loan. Lowering the origination fee could raise the interest rate or lead to higher processing and underwriting fees.
Discount Fee or Points directly impact the interest rate. Sometimes referred to as buying down the rate, you pay higher closing costs in exchange for lower interest. The correlated rate reduction will depend on the interest rate environment at the time of the loan and the term. One percent of the loan amount is worth one point.
Mortgage Broker Fee goes to mortgage brokers. You should pay either origination or a mortgage broker fee, not both.
Processing Fee pays the lender for processing the loan, including gathering necessary documentation.
Application Fee/Commitment Fee is due at the time of the application. Regardless of approval, lenders do not refund the application fee.
Underwriting Fee pays for underwriting the loan.
Lock-In Fee secures the loan rate for a set time. For instance, the lender may offer a free lock for 30 days, but charge for a longer rate lock or a rate lock extension.
Lenders charge for ordered services which commonly include the following:
| Item | Fee |
|---|---|
| Credit Report Fee | $20 to $40 |
| Tax Service Fee | $50 |
| Wire Transfer Fee | $25 |
| Flood Certification | $20 |
| Courier Fee/Postal Fee | $20 to $30 |
Credit Report Fee: Lenders review all three credit reports, and reporting agencies charge for their services.
Tax Service Fee pays for the review of court records identifying any tax liens on the property.
Wire Transfer Fee: Home loans typically require multiple wire transfers. For instance, the bank wires the loan proceeds and then the seller receives a payment along with a lender to pay off any existing loans.
Flood Certification: A report verifying whether the home is in a designated flood zone determined by FEMA maps, which can raise the cost of insuring the home.
Courier Fee/ Postage Fee pays for overnight or hand-delivered documents.
Upfront Fees
Government-backed loans require upfront fees, paid at closing, while conventional loans do not require upfront fees.
For example, USDA loans charge 2.75% of the loan amount and FHA loans charge 1.75% in upfront fees. VA loans range from 1.25% to 3.3% of the loan amount based on the previous usage of VA home loan benefits, military status, and down payment. VA loans can waive the fee for veterans disabled in the line of duty.
Third party companies charge for services required to close the loan. Once the lender orders these services, you owe the money, even if the loan does not close. In some cases, you can choose the service provider.
| Item | Fees |
|---|---|
| Attorney Fees | $400+ |
| Notary Fee | $100-$150 |
| Closing Protection Letter | $50 |
| Survey Fee | $400+ |
| Escrow Fee/ Settlement Fee/ Closing Fee | $300-$700+ |
| Appraisal | $350-$500+ |
| Title Report/ Title Insurance | $300-$1,500+ |
| Pest Inspection | $100-$500 |
Attorney Fees: Many states require an attorney closing, and you choose the attorney.
Notary Fee for signatures in an attorney or escrow company’s office. You can often request a waiver of these fees.
Closing Protection Letter: When the escrow and title company are not associated, the fee holds the title company responsible if the escrow company does not provide closing funds.
Survey Fee establishes the property boundaries.
Escrow Fee/Settlement Fee/Closing Fee pays costs associated with the escrow company’s duty to secure funds and documents during the mortgage process and deliver money at closing to appropriate parties.
Appraisal establishes the market value of the home. All lenders require an appraisal and choose the company.
Title Report/Title Insurance: The attorney or title company completes the title search to ensure the buyer receives a clean title. Title insurance protects against third-party claims on the property. The lender’s title insurance protects the bank, while the owner’s title policy protects the owner.
Inspections: Most home loans require a general home inspection and termite inspection. You choose the inspection companies.
The county of residence determines government processing fees.
| Item | Fee |
|---|---|
| Transfer Taxes | Varies |
| Recording Fee | $20 to $250 |
Transfer Taxes pay to transfer title to the new owner.
Recording Fee pays to record the deed, which the attorney completes.
All loans have some pre-paid fees included in the closing costs.
| Item | Fee |
|---|---|
| Homeowners Insurance | $400-$1,000+ |
| Tax Reserves | $500-$5,000+ |
| Flood Insurance | $300-$1,000+ |
| Prepaid Daily Interest Charges | $100-$2,000+ |
| Mortgage Insurance | $100-$700+ |
Homeowners Insurance: You pay the first year upfront. If you establish an escrow, you make monthly payments in addition to the loan payment to ensure enough funds in escrow the following year. Lenders require home insurance. The price depends on the location and the value of the home. You choose the insurance company.
Tax Reserves: You and the seller pay pro-rated amount to cover property taxes in the first year of ownership. You can include future tax payments in an escrow account.
Flood Insurance: All homes in a flood zone must carry flood insurance. You pre-pay the first year at closing.
Prepaid Daily Interest Charges: You prepay interest from the day of closing until the end of the month.
Mortgage Insurance: Loans with less than 20% down typically require mortgage insurance. You pay an upfront fee, plus two months’ worth of premiums at closing and then monthly payments.