Lately, I’ve had several people ask me to help them understand loan closing costs and fees to watch out for. Unfortunately, I see service members and veterans get burned all the time by unnecessarily high closing costs and fees.
Know this, it is entirely possible for a lender to give you a great interest rate, and still be the worse loan because of these fees.
That is why you need to know what you’re looking at when it comes to reviewing loan closing costs and documents.
What are Loan Closing Costs?
Closing costs are the myriad of fees that you pay when finalizing a mortgage. Any time you purchase a home or refinance you will be subjected to paying closing costs, unless you get the seller to pay them as a part of your negotiations.
How Much are Loan Closing Costs?
Loan closing costs generally range between 2% and 5% of the loan amount. On a $100,000 mortgage, you would be looking to pay between $2,000 and $5,000.
The most affordable way to cover your closing costs is to pay them as a one-time expense. There are times where you can wrap closing costs into the loan in order to finance them, but then you’ll be paying interest on those costs for the entire mortgage duration. Still, this might be worthwhile if you don’t have cash for the closing costs, and couldn’t negotiate them out of the sale. To clarify, you’re not actually wrapping the closing costs into the loan—except on a refinance—however, you can have the seller credit closing costs back to you, which functions in relatively the same way.
Sometimes you can negotiate with your lender, or shop around with different lenders, to lower your potential loan closing costs.
My favorite way to lower closing costs is to convince the seller to cover some of them.
For example, if I offer $10,000 under the asking price, and the seller counters back at full price, I may agree, but ask for them to cover all closing costs and fees. By doing this, I will have a little more on the mortgage than my original offer, but I won’t have to put as much money down when I close.
When Do You Pay Closing Costs?
You will pay the loan closing costs at the end of the loan process, otherwise known as closing day.
These costs can be paid at closing, or wrapped into the loan, depending on what fits your financial situation the best. Again, they can only be wrapped during a refinance.
Recurring costs are those things like mortgage insurance, principal, interest, property taxes, insurance, annual fees, and any cost associated with the loan that is paid continually throughout your ownership.
Mortgage Insurance Fees
Mortgage insurance: is required on any loan that you pay less than 20% down for, with the exception of the VA loan. The VA loan does have a funding fee but that isn’t technically mortgage insurance, nor is it anywhere near as bad.
Sometimes the first year of this fee is paid upfront, but more often than not private mortgage insurance (PMI) is tacked on to your monthly payment.
If you use an FHA loan you will also be required to pay a mortgage insurance premium.
These are all fairly standard fees, just make sure you understand what they are from your lender.
Property Taxes, Annual Fees, and Insurance
Property taxes: Your lender may require that you pay one or two months’ property taxes when you close on the property. Either way, you’ll be paying property taxes for the duration of ownership.
Annual assessments: if you purchase a condo, or property within a homeowners association (HOA) they may require annual fees or monthly fees. In fact, I don’t know any HOA without fees.
Homeowners insurance premium: Your lender will require you to carry homeowners insurance on the property to protect their investment. As you can expect, these insurance fees are recurring for the duration of ownership as well.
Also, you can wrap your Principle, Interest, Taxes, and Insurance (PITI) into the mortgage payment you give the bank. This is the impound, or escrow, method of paying, and a lot of lenders will offer a lower interest rate for paying impounds.
In case you can’t put two and two together—I’m looking at you Marines—you have probably figured out that nonrecurring fees are in fact…not, recurring.
These are the loan closing costs and fees that you pay upfront and never pay again.
Home inspection: Whenever you go under contract on a property one of the first things you will do is order an inspection. Most lenders do not require this, but some of them will, and it is good practice to order a home inspection regardless.
Before lending you hundreds of thousands of dollars, the bank wants to ensure the property is structurally sound, and you should too. Inspections will vary based on what kind of property it is, and how big, but they generally average between $300-$600.
Appraisal fee: Lender’s also want to confirm that the property is worth at least as much as you are paying for it. For this reason, you will need to hire an appraiser anytime you apply for a loan to purchase a home or refinance.
These are the fees that lenders have more control over and can fluctuate a little bit.
Application fee: The application fee is used to cover the cost of processing your request for a new loan. This will cover the costs associated with your credit checks and administrative requests. Obviously, these fees will fluctuate based on the lender and their processes.
This fee is basically passed through to you so that the lender doesn’t have to pay any fees associated with processing your loan in the chance that you don’t qualify for a loan.
Assumption fee: This only comes into play if you’re assuming the seller’s mortgage. If applicable, this fee would be based on the value of the remaining mortgage balance that you’re taking over.
Prepaid interest: Let’s say you close on a loan on January 15th, but the first mortgage payment isn’t due until March 1st. In this scenario, the lender will most likely charge you upfront for the interest that accrues on the loan between the closing date, and the first monthly payment.
Prepaid taxes: Depending on when in the local tax-cycle you close on a property, you may be required to prepay taxes as well.
Loan origination fee: The loan origination fees can be a beast. These are also known as an underwriting fee, processing fee, or sometimes the administrative fee. In essence, this fee is the one you really need to pay attention too, because this is one of the fees that lenders can overcharge for, and hide expenses to give you a lower rate.
You should be expecting to pay around 0.5%-1% of the loan cost in origination fees or $500 to $1,000 on a $100,000 mortgage.
Attorney’s fee: Your state may require an attorney present at the closing table, and these would be the fees associated with their time. The number of hours that attorney is at closing will determine how much this fee cost.
Mortgage broker fee: If you work with a mortgage broker to find a loan—instead of with a direct-to-seller lender—they will tac on this fee as their commission for helping you with the loan. This commission generally ranges from 0.5% to 2.75% of the home purchase price.
This is something you should iron out before working with a mortgage broker. Also, you should be aware that brokers often take a little longer to process loans because they have to work within the confines of whatever wholesaler they find to do your mortgage.
Discount points: By paying discount points, you can reduce the interest rate you pay over the life of the loan. Sometimes, this is absolutely worthwhile, and sometimes, this is unnecessary, depending on the size of your loan, and the interest rate you’re locking in.
One point equals 1% of the cost of the loan, so if you pay two points on a $100,000 loan, it will cost you $2,000 to buy down that loan.
The longer you plan to stay in the home, the more valuable buying down the rate generally is! This is often referred to as recoup time, which you should always calculate to determine whether or not this is worth doing.
For example, if you save $50/month on a mortgage by refinancing, and the cost of refinancing is $6,000, then it would take you 120 months (10 years) to recoup the cost of refinancing. If you don’t still own the house in ten years, it is not worth refinancing.
Title fees are what the title company will charge you to ensure that you’re purchasing a home with a clean title. Your lender will require title searches, and insurance, to qualify for their loan.
Title search fees: A title search is conducted to ensure that the person selling the home is the legal owner of it. This also verifies that there are no outstanding claims, or liens, against the property. This can be fairly labor-intensive, depending on how well-kept the real estate records are.
Title search fees generally hover around $200 but can vary amount title companies in your market.
Owner’s title insurance: You will probably want to consider paying for title insurance to protect yourself against any issues that arise with the title after closing. It is rare that these issues will arise, but you never know. Title insurance generally costs 0.5% to 1% of the purchase price.
Lender’s title insurance: Most lenders also require a loan policy, which protects them in case there is an error in the title search.
Escrow Fees: My properties are in Missouri, which is a title-only closing state. Many states are Title and Escrow states, so you will most likely be paying fees for both companies in the process.
Summary of Mortgage Closing Costs
Here is an average breakdown for closing costs, but know that it can vary by market and lender.
- Appraisal fee ($300-$400)
- Credit report fee ($100)
- Home inspection ($300-$500)
- Flood check fee ($10-$20 when required)
- Application fee (varies)
- Assumption fee (varies)
- Attorney’s fee (hourly)
- Prepaid interest (based on loan amount)
- Origination fee (about 0.5%-1% of loan amount)
- Discount points (1 point costs 1% of the loan amount)
- Mortgage broker fee (0.50% to 2.75%)
- Mortgage insurance application fee (varies)
- Upfront mortgage insurance (0.55% to 2.25%)
- FHA, VA and USDA fees (1% to 3.3%)
- Property taxes (two months’ worth)
- Upfront HOA fee (varies)
- Homeowners insurance (depends on home value and location)
- Title search fee (about $200)
- Lender’s title insurance (varies)
- Owner’s title insurance (0.5% to 1% of purchase price)
Junk Fees to Avoid with Loan Closing Costs
Junk fees, or garbage fees, are tacked onto most mortgages. There isn’t any way to completely ignore these fees, but you can at least minimize them most of the time.
Look for unnecessary processing and documentation fees in the below categories:
- Application fee
- Mortgage rate lock fee
- Underwriting fee
- Broker rebate
- Loan processing fee
The Bottom Line with Loan Closing Costs
You owe it to yourself to scrutinize the closing statement and all of your loan closing costs and fees. You need to know exactly what you’re paying for, and how it compares to other lenders in the area.
I’m not advocating for rate-shopping lenders after you have worked with them for weeks on end, but I am saying you need to make sure that you aren’t getting bent over by the lender.
A lower interest rate doesn’t always mean a more affordable loan. Make sure you look at everything objectively, and not just at the interest rate.