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The 411 On Mortgage Closing Costs
If you’re in the process of purchasing or refinancing a home, or even just in the research stage, you’ve probably heard the term ‘closing costs’ more than once. Closing costs are a necessary part of any mortgage loan transaction. However, not everyone knows what they’re comprised of, why they exist, or how they work. Before we dive in, there are a few terms we’ll reference that we’ve defined below:
- Lender – the financial institution you would borrow money from to purchase your home. Example: First Bank Financial Centre
- Borrower – you, the person/people who are borrowing the money to purchase your home.
- Purchase Transaction – when you are purchasing the home/taking out a mortgage loan from your financial institution.
- Refinance Transaction – when you are refinancing an existing loan on an existing property, through your financial institution.
Here are some things you should know.
What are closing costs typically comprised of?
The term “closing costs” encompasses a variety of fees and expenses that must be paid before a borrower can officially close on their mortgage loan. Some of these costs include title related fees, government fees, mortgage insurance, and property related fees, to name a few. Below is a breakdown of what these expenses may include.
Title related fees:
- Lender’s Title Insurance – protects the lender in case a problem with the title of the property arises.
- Title Endorsements – additional coverage for the Lender’s Title Insurance that can vary by property state, mortgage product and by property type.
- Owner’s Title Insurance – ensures that the borrower has rightfully become owner of the property; protecting the borrower.
- Attorney Fee – in certain states, an attorney may be used to conduct the loan closing. In other states, a borrower may choose the option of hiring an attorney for peace of mind that the transaction is done correctly.
- Other title fees vary by state, and may include a title search fee, closing protection letter, wire fee, and courier fee, to name a few.
- Recording Fees – fees charged by the county to record the mortgage document. If it’s a purchase transaction, there will be a recording fee on the deed.
- Transfer Taxes and State Taxes – depending on the state, there can be transfer taxes on a purchase transaction. Some states charge a tax based on the amount of the mortgage for both purchases and refinances.
- If you’re using certain government products, or certain conventional loans with less than 20% down payment/equity, the loan may require mortgage insurance. This could be an up-front and/or monthly fee.
Property related fees:
- Appraisal Fee – is required on nearly all loans.
- Pest Inspection – in certain states, a pest inspection may be required.
- Flood Determination – confirmation as to whether a property is in a federally declared flood zone.
- If property taxes are going to be due, the lender may require they be paid at the time of loan closing. Homeowners insurance is a requirement, and again may be required to be paid at closing if not already obtained. Flood insurance is required if the property is in a flood zone. Prepaid interest will also be likely – Example: If the loan is closing April 15th, and the first payment is due June 1st, the extra 15 days of interest will be paid at closing.
- Depending on the loan program, an escrow account for insurance and taxes may be required.
- What is an escrow account? Established by the mortgage lender, it is a banking account meant to hold the money for the borrower’s property taxes and insurance payments.
- Depending on when the insurance or taxes will be due, an amount will likely be collected at closing to make sure those items will be paid from the escrow account when the time has come.
- Lenders may charge additional flat fees such as processing, administration and origination fees.
- Discount Points – depending on the rate the borrower chooses, the borrower could be charged a fee in order to select a reduced interest rate.
How are closing costs factored into a loan closing?
These fees are typically paid at closing on a purchase transaction. Some lenders may require certain fees to be paid prior to closing, such as an appraisal fee. Typically, you wouldn’t see closing costs figured into your loan as part of your regular mortgage payment, however, on refinance transactions, and certain government up-front mortgage insurance, costs can be included in the loan, resulting in a higher loan amount and higher payment.
Who typically pays the closing costs?
On refinance transactions, the borrower pays the costs. On purchase transactions, the fees are mostly paid by the borrower. But in certain states, the seller may traditionally pay certain fees. For example, in Wisconsin, transfer taxes and owner’s title policy are typically paid by the seller. Depending on what is agreed between the seller and buyer, the seller may give a credit towards closing costs.
Will the location of my new house affect what I pay in closing costs?
Yes, depending on the location, certain fees may be higher. A Florida homeowner’s insurance policy may be higher than a Wisconsin insurance policy due to the threat of hurricanes. Lender’s and owner’s title policy costs vary by state. Closing fees can vary within a state as well, for example, metro Chicago closing fees are much higher than those in a rural area of Illinois.
Do I have to pay closing costs if I refinance my existing loan?
Typically yes. Another appraisal will be needed to ensure the value remains. The lender’s title policy is needed again to ensure no additional liens were put on the property. Certain fees such as transfer taxes would not apply though.
Are the fees set in stone?
Most fees aren’t something the borrower can negotiate. However, title related fees are “shoppable”, meaning the borrower is allowed to determine who will provide services like the title and closing, which may result in a lower fee depending on what organizations are chosen.
If you would like more information about closing costs, or would like to talk to a Mortgage Lender about a loan, please visit FBFCWI.com/mortgage.