Posted by How much are closing costs on a mortgage? Many first time homebuyers go into the mortgage process without a fair estimate of how much their closing costs will be. They, and all buyers deserve a better approach. In fact, if a lender says to estimate your closing costs by multiplying the home price by 3% run and run fast!
Phone: 602.435.2149
Email: Team@JeremyHouse.com
What are closing costs on a mortgage?
First, let’s dive into what actually makes up your closing costs. Closing costs represent the cost of getting a new home loan. Closing costs are also referred to as “settlement charges”. They include both hard costs as well as “Pre-paid items” which are not hard costs. Either way, when you hear “closing costs” or “settlement charges” generally they refer to the same thing.
There are 5 categories of closing costs on a mortgage Loan Estimate.
Lender Fees
Firstly, each loan has what are called “lender fees”. On the Loan Estimate these are all the fees that you see in Box A labeled “origination charges.” Typical fees you will see in this section are:
- Lender admin fees (often called “underwriting” and/or “processing” fees)
- Origination fees (expressed as a percentage of the loan amount)
- Discount fees (expressed as a percentage of the loan amount)
Every lender’s fees will vary. In fact, each lender may call the admin fee something slightly different. The most common names given are processing, underwriting, admin, application and/or broker fee.
Title Fees
When buying a home, you will also incur title fees. States that are considered “attorney states” due to using lawyers in the home buying process may have title fees and/or attorney fees that fall into this category. Typical title fees include:
- Admin or settlement fee
- Lenders title insurance
- Owner’s title insurance
- Recording fee
- Endorsements
Title fees vary slightly between title companies. While the settlement fee, recording fee and endorsements are not based on loan amount, both the owner’s and lenders title insurance policy costs increase as the loan amount increases.
3rd party fees
Fees paid to an outside party to perform services related to the loan fall under the 3rd part fee heading. For example, an appraisal fee or a credit report fee are both 3rd party fees.
Pre-paid Items
Third, each loan has what are called pre-paid items. The fees in this section are for future costs that a homeowner will incur. For example, pre-paid property taxes, homeowner’s insurance and even per diem mortgage interest go into this category.
More specifically, borrowers are typically charged for the following in the pre-paid section:
- 1 years homeowner’s insurance (on purchases)
- Property taxes to act as a buffer in their escrow account
- Homeowner’s insurance to act as a buffer in their escrow account
- Per diem interest (from the day of loan funding to the end of that month)
The buffer taxes and homeowner’s insurance sit in the borrower’s escrow account. Then, later on if/when property taxes or homeowner’s insurance rates increase there are funds in the escrow account to help cover those increases.
Other Fees
Finally, there is the other fee section. Any fee that does not fit into the other 4 categories goes in this catch all section. Commonly, fees such as pre-paid HOA dues, capital contribution costs as well as any borrower debts being paid off at closing are labeled other fees.
Phone: 602.435.2149
Email: Team@JeremyHouse.com
Estimating Closing Costs on a Mortgage
When it comes to estimating how much closing costs on a mortgage will be, there is a right way and a wrong way to do it. Whether you are using an FHA, VA, Conventional or JUMBO loan make sure to do this correctly. First let’s talk about what not to do.
What Not to do
Do NOT apply a flat percentage method to estimate the total closing costs on a mortgage. Many loan officers and real estate agents tell clients to multiply the purchase price or loan amount by 3% (or some other arbitrary number) to calculate closing costs. This is highly inaccurate. Here is why, closing cost on a mortgage depend on several variables. For example:
- Location: Depending on where the property is located you are going to have different property taxes, HOA related fees, title/attorney fees
- Loan type: The loan type itself can impact closing costs. For example, some down payment assistance programs have additional administrative fees compared to non DPA loans.
- Borrowers situation: Certain borrower scenarios may require additional fees due to credit score and other characteristics.
- Occupancy type: Often, a loan for an investment property carries higher fees than a loan for a primary residence due to how LLPA’s for rental properties are structured by the GSE’s.
Correct Way to Estimate Closing Costs
Given all the variables that impact the closing costs on a mortgage, the only reliably correct way to estimate the total is working with your loan officer. Your loan officer should take the time to give you an accurate estimate of your total closing costs based on your unique scenario. This way, all the factors listed above are accounted for resulting in an accurate estimate of your closing costs.
In other words, your loan officer should estimate each of the following for you:
- Lender fees
- Title fees
- 3rd Party fees
- Pre-paid items
- Other fees
Then, using the total of all these fee categories you will have a dependable estimate for closing costs on a mortgage. Keep in mind this is always just an estimate for both purchases and refinances. Exact fees are determined once your loan has been fully processed.
Phone: 602.435.2149
Email: Team@JeremyHouse.com
Why an Accurate Closing Cost Estimate is Important
Accurately estimating closing costs on a mortgage is crucial to having a smooth mortgage experience. First, having an accurate estimate allows you to financially plan appropriately. Purchasing a house is a major financial transaction. Between your down payment and closing costs, proper budgeting is essential.
Secondly, estimating closing costs on a mortgage correctly helps in the negotiation phase. For example, when asking a seller to pay some or all of your closing costs it helps to have a reliable estimate of those costs. Otherwise, asking the seller to pay a proper amount is difficult. You may wind up not asking for enough. Alternatively, you may ask the seller to pay more than what you actually need leaving money on the table at the end of the transaction which benefits the seller.