During the process of buying a house, becoming educated and aware of the fees and costs associated with a mortgage loan is a good idea. According to an annual survey by Bankrate.com in 2016, the state of New York had the highest average closing costs of $2,648 and Pennsylvania was the lowest with $1,734. These numbers were based on a $200,000 mortgage with a 20 percent down payment. Some fees can be negotiated down during the buying process but first, you need to understand what these costs are and why some of them are needed.
Third-party costs are expenses paid to others such as attorneys, title companies, escrow companies, inspectors, or insurance firms.
Recording Fees for Deed – These are paid to the county clerk to record the deed and mortgage and change the property tax billing.
State and Local Fees – These fees can include mortgage taxes levied by states as well as other local fees.
Pro-Rated Taxes – Taxes owed such as school taxes, municipal taxes may have to be split between you and the seller because they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2 months while the seller would owe taxes for the other 10 months. Prorated taxes usually are paid based on the number of days (not months) of ownership. Some lenders may require you to set up an escrow account to cover these bills. If your lender does not require an escrow account, you may want to set up a special account on your own to make sure you have money set aside for these important, and large, bills.
Title Search Costs – Usually your attorney or title company will do or arrange for the title search to make sure there are no obstacles (liens, lawsuits) to your owning the home.
Homeowner’s Insurance – Most lenders require that you prepay the first year’s premium for homeowner’s insurance (sometimes called hazard insurance) and bring proof of payment to the closing. This ensures that their investment will be secured, even if the house is destroyed.
Owner’s Title Insurance – You may want to purchase title insurance for yourself so that if problems arise, you are not left owing a mortgage on a property you no longer own. A thorough title search (going back to 1900 if necessary) is often assurance enough of a clear title.
Land Survey – Most lenders will require that the property be surveyed to make sure that no one has encroached on it and to verify the buildings and improvements to the property.
Finance and Lender Charges
Most people associate closing costs with the finance charges levied by mortgage lenders. The charges you pay will vary among lenders, so it pays to shop around for the best combination of mortgage terms and closing (or settlement) costs. You may have to pay the following charges:
Origination or Application Fees – These are fees for processing the mortgage application and may be a flat fee or a percentage of the mortgage.
Credit Report – If you are making a small down payment (usually less than 25 percent), most lenders will require a credit report on you and your spouse or equity partner. This fee often is a part of the origination fee.
Points – A point is equal to 1 percent of the amount borrowed. Points can be payable when the loan is approved (before closing) or at closing. For FHA and VA mortgages the seller, not the buyer, must pay the points. Even if you are not using an FHA or VA mortgage, you may want to negotiate points in the purchase offer. Some lenders will let you finance points, adding this cost to the mortgage, which will increase your interest costs. If you pay the points upfront, they are deductible in your income taxes in the year they are paid. Different deductibility rules apply to second homes.
Lender’s Attorney’s Fees – Lenders may have their attorney draw up documents, check to see that the title is clear, and represent them at the closing.
Document Preparation Fees – You will see an amazing array of papers, ranging from the application to the acceptance to the closing documents. Lenders may charge for these, or they may be included in the application and/or attorney’s fees.
Preparation of Amortization Schedule – Some lenders will prepare a detailed amortization schedule for the full term of your mortgage. They are more likely to do this for fixed mortgages than for adjustable mortgages.
Appraisal – Lenders want to be sure the property is worth at least as much as the mortgage. Professional property appraisers will compare the value of the house to that of similar properties in the neighborhood or community.
Lender’s Mortgage Insurance – If your down payment is less than 20 percent, many lenders will require that you purchase private mortgage insurance (PMI) for the amount of the loan. This way, if you default on the loan, the lender will recover his money. These insurance premiums will continue until your principal payments plus down payment equal 20 percent of the selling price, but they may continue for the life of the loan. The premiums usually are added to any amount you must escrow for taxes and homeowner’s insurance.
Lender’s Title Insurance – Even though there is a title search for any obstacle (liens, lawsuits), many lenders require insurance so that should a problem arise, they can recover their mortgage investment. This is a one-time insurance premium, usually paid at closing; it is insurance for the lender only, not for you as a purchaser.
Inspection Required by Lender – If you apply for an FHA or VA mortgage, the lender will require a termite inspection. In many rural areas, lenders will require a water test to make sure the well and water system will maintain an adequate supply of water to the house (this is usually a test for quantity, not a test for water quality).
Prepaid Interest – Your first regular mortgage payment is usually due about 6 to 8 weeks after you close (for example, if you close in August, your first regular payment will be in October; the October payment covers the cost of borrowing money for the month of September). Interest costs, however, start as soon as you close. The lender will calculate how much interest you owe for the fraction of the month in which you close. For example, if you close on August 25, you would owe interest for 6 days. In some cases, this is due at closing.
Inspection Fee – In addition to inspections required by the lender, you may make the purchase offer contingent on satisfactory completion of some other inspections. You and the seller will need to negotiate these fees.
Appraisal Fee – You may want to hire your own appraiser, either before you sign a purchase offer or after seeing the results of the lender’s appraisal.