Mortgage 101: Closing costs and fees explained
Many borrowers are surprised by the additional costs involved in buying a home. On top of the down payment, the buyer is also required to pay a variety of closing costs to finalize the purchase of a home. You should factor these costs into your home buying budget to ensure you have enough money saved up when it’s time to sign on the dotted line.
What are closing costs?
Closing costs are fees related to services that must be performed to complete a home loan. These costs are over and above the amount you borrow for a mortgage and the down payment. When you close on a mortgage you will also owe the lender and third parties closing costs. Typically, the home buyer is responsible for paying closing costs, but there are exceptions on some loans. For instance, with a Veterans Affairs (VA) loan, the sellers pays some of the closing costs.
What charges go into your total closing costs?
Closing costs typically include things such as:
- A fee for obtaining a credit report
- A Loan origination fee – the amount the lender charges for processing loan paperwork
- Legal fees
- Charges for home inspections
- Appraisal fee
- Survey fee – the cost to verify property lines
- Title insurance – this protects the lender if the title isn’t clean
- Title search fee – the cost for a background check on the title to make sure there aren’t unpaid mortgages or tax liens on the property
- An escrow deposit
- A recording fee – The cost to record the transaction in the city or county’s records
- Underwriting fee – covers the cost of evaluating the loan application
How much will you pay in closing costs?
Typically, total closing costs range from 2 – 5% of a home’s purchase price, although this can vary based on where you live and the property you buy. Lenders are required by law to disclose to you, in writing, an estimate of what the closing costs might be for your property when you apply for a loan. This is known as a Good Faith Estimate (GFE). The GFE is a standardized government form that lets you review your potential loan and gives you an easy-to-read breakdown of your loan terms and estimated closing charges.
