All home loans – whether for purchasing a new property or refinancing a home – will involve closing costs. Closing costs vary depending on the loan amount, mortgage type, and the area of the country where you’re buying or refinancing. There are a variety of fees included in closing costs; escrow fees for example are not the same as closing costs but are a part of them. Other items included in closing costs are fees for processing, title insurance/search (title closing fee), mortgage taxes, appraisals, certifications, and more. Though closing costs are an unavoidable part of doing business, can be confusing, and are subject to change, it is important that buyers understand these fees and their market rates.
Homebuyers usually pay between about 2% to 5% of the purchase price of their home in closing costs. Included in the cost are numerous fees that can add up quickly and are very important to understand as a home buyer.
Financing a home loan can happen through a private bank, a mortgage company, or a non-profit credit union. Each lender will charge for handling the loan and that charge can include a variety of fees including an origination fee, a mortgage broker fee, a discount fee, a processing fee, an underwriting fee, an application fee, and even a lock-in fee.
An origination fee (typically 0-1% of the loan amount) is common though not guaranteed fee that forms a portion of the lender’s compensation for originating your loan. The mortgage broker fee (typically 0-1% of the loan amount) is the same as an origination fee but for the mortgage broker. Because of this, you should never be charged both a mortgage broker fee and an origination fee.
Discount fees, also known as discount points, are fees paid to the lender to lower your interest rate. For each discount point you pay (at the equivalent of 1% of the total loan amount), your lender cuts the interest rate down by a certain percentage point (typically .25%, though this number can vary).
Not all loan companies charge a processing fee, but those that do would use that money to hire loan processors who focus on the behind-the-scenes work that goes into your loan.
Aptly named, an underwriting fee pays the underwriter who makes the final decision on your loan’s approval. This money would go towards paying people to analyze your documents and loan application to decide whether or not to ultimately approve your loan.
Less common is an application fee, though these can range from $100-$350. An application fee is charged by a lender as an upfront, non-refundable deposit to consider your loan application.
Finally, a lock-in fee (typically ranging from $100-$300) is charged to lock in your interest rate while your application is being processed despite the daily fluctuations of mortgage interest rates.
Your closing costs will also include the cost of a variety of services involved in processing your loan. A credit card report tells the lender your credit history (typically $20-$40). A flood certification (about $20) tells a lender if your home is in a flood zone – if so, specific flood insurance will be required. A tax service fee ($50) goes to a company that ensures all tax liens are paid on a property so that the city or country doesn’t seize the home for past due taxes. A wire transfer fee ($25) is often involved if you wire loan funds from your bank. If a lender needs to overnight or even hand-deliver documents to process your loan, there may be a courier fee or postage fee (typically $20-$30).
Government-backed loans may include an upfront fee that will be rolled into your final loan amount. Though they’re not technically a part of the closing costs, they would likely be included in the fee estimate you receive from a lender if you are applying for a USDA, FHA, or VA loan. The title company and appraiser may also charge a fee, as would pest inspection, a notary, a surveyor, and an attorney. Government-processing charges can include a recording fee and a transfer tax, depending on where the property is located.
Finally, an escrow fee is paid to the escrow company which handles all the funds involved in the transaction of buying your home. An escrow company makes sure everyone is paid the right amount and that all documents are signed and notarized properly. Perhaps most importantly, escrow company provides a final recording of all documents with your county or other local government entity. This ensures your ownership is indisputable and that there’s a record proving ownership. The escrow fee varies depending on the loan amount.
When buying a property, fees are unavoidable. However, some of the costs are negotiable and it may be worth shopping around. Certainly, it’s important to have a good understanding of all the costs involved in buying your property. For more information, contact Anchor Seaport Escrow, an independent escrow company serving the Southern California area for more than 40 years, here.