Mortgage Closing Costs

Closing is the part of the property-buying process when the contract between the buyer and seller is finalized, when everything is signed, and the property title changes hands. There are a number of costs associated with closing, many of which are part of the mortgage. Some of these costs must be paid in advance of closing, and some are paid at closing. Closing costs will depend on both the amount of money you’re borrowing, and the value of the property you’re purchasing. Closing costs are usually three to six percent of the value of the property.

Costs which are payable in advance are all involved with the mortgage, and are required by the lender to process your application. These include the following:

• The application fee for the mortgage is payable at the time you apply. This is the cost of processing the loan.

• Your lender will review your credit history when you apply for a mortgage. The fee charged for this review includes the cost of obtaining credit reports.

• An appraisal fee—this is often required by the lender even if you are refinancing your existing property, to ensure that your mortgage is appropriate for the value of the property.

• Interest on your loan from the day of closing until your first mortgage payment.

• Funds for your escrow account—up to two months of advance payments for property taxes, homeowner’s insurance, hazard insurance, and private mortgage insurance (if you have it)

The remaining closing costs are typically payable at the time of closing and include the following:

• Administration fees and document preparation fees

• A tax service fee if the lender hires an independent service to oversee payment of property taxes

• Inspection fees (pest inspection and property inspection)

• Title search—property records are examined to make sure it is legally owned by the seller and there are no outstanding liens or mortgages on the property.

• Title insurance—protects the buyer if there are tax liens or unpaid mortgages that are not discovered during the title search.

• Loan origination fees (also known as points). The flat fee is one point, which is equal to one percent of the mortgage total. By paying more points you can reduce your mortgage interest rate (note that not all mortgages will offer points).

• A broker fee, if you use a mortgage broker.

There are also “hidden” costs to contend with. These are called hidden costs because they are not required by law to be disclosed in the Good Faith Estimate that you will receive from your lender. These include document delivery fees (couriers and overnight delivery), notary fees, and processing fees. Ask your lender about these hidden costs—you may be able to reduce them by asking your lender to send documents by regular mail or electronically.

Usually the buyer pays closing costs. If your cash flow is tight, you can try and negotiate with the seller to have them pay these costs (or at least some of them). Typically this means offering a higher price on the house with the stipulation that the seller pays closing costs (add this as a contingency clause in the purchase contract). Essentially this doesn’t change the amount of money you pay, but it means you don’t need as much cash up front.