Closing costs cover the cost to process and underwrite a loan. Each loan has different costs but understanding what the fees are for and when you pay them can help you prepare for the loan process.
What are Closing Costs?
Closing costs are the costs incurred to underwrite and process your loan. Borrowers pay closing costs at the closing when they buy a home or refinance an existing loan. Closing on a mortgage loan requires services from more than just the lender too.
Professionals involved in the mortgage process include a loan officer, underwriter, real estate appraiser, real estate inspector, closing representative, and oftentimes an attorney.
How much you pay depends on the complexity of your loan, the loan size, and the services needed to close your loan.
The Closing Cost Breakdown
Each loan has different closing costs, but in general, borrowers pay the following fees.
- Application fees – The application fee covers the cost of processing your application. It includes the cost to pull your credit, determine the documents required, and the communication between you, the loan officer, and the loan processor.
- Origination fees – This fee covers the cost of processing and underwriting your loan. It’s an all-encompassing fee that covers the lender’s costs to complete the loan process.
- Discount points – If you want to ‘buy your rate down’ you can pay discount points to get a lower rate. One point equals one percent of the loan amount. The amount it decreases your rate varies based on the market at the time.
- Mortgage insurance – If you make less than a 20% down payment, or borrow a government loan, such as an FHA or USDA loan, you’ll pay mortgage insurance. PMI on a conventional loan range from 0.5% – 1.5% and FHA loan annual MIP costs 0.85% of the loan amount annually.
- Upfront fees – If you borrow a government loan, you’ll owe an upfront funding fee too. FHA loans charge 1.75% of the loan amount, USDA loans charge 1%, and VA loans charge an average of 2.3% of the loan amount.
- Appraisal – An appraisal costs anywhere from $300 – $500 depending on the location and size of the loan. The appraisal is necessary to determine the home’s value to ensure there is enough collateral.
- Title fees – A title search is necessary to ensure the home can be legally transferred and there aren’t any existing liens. After the title search, we’ll require title insurance to protect our investment in the home from any ownership claims or liens that went overlooked during the search.
Closing costs are a part of the loan process. They cover the costs incurred to process your loan and get you to the closing table. We work with our clients to keep closing costs to a minimum while helping you get the right financing for your purchase or refinance.
If you’re ready to explore your loan options, contact us today. We’d be happy to help you find the perfect loan for your situation.