Guide to mortgage closing costs: What average mortgage costs are, and how to keep yours low
Closing costs when you buy or refinance a home
First-timers may be shocked at the amount of mortgage closing costs required to buy a home. And those who refinance get another shock, because when you buy a home, you often split some or all of the closing costs. But when you refinance, they're all yours. This guide provides a complete list of the most common closing costs, average closing costs by state, and tips on what you can do to minimize them.Verify your new rate (Mar 24th, 2018)
How much are closing costs?
Buying or refinancing real estate is a complex business. Contracts involving property have to conform to rules that other agreements do not. (For instance, you can't enforce an oral agreement for a home purchase.) Here is a partial list of items that have to be completed by someone, and none of those someones work for free:
Mortgage lenders hire loan officers (or pay commissions to mortgage brokers) to promote their products and help borrowers select the best mortgage for which they qualify. They work with teams of underwriters, loan processors, funding departments and auditors to make sure that your experience is good and business is conducted according to law.
Lenders either risk their own money when they lend to you, or they sell the loan at a discount to investors. So they assume some risk that you'll default, and part of what they charge is to compensate for the risk they take.
Here is a list of fees that mortgage companies may charge. However, it doesn't matter what lenders call the fees. They all go to the lender, and it's the bottom line that counts. You could call every charge listed below a different flavor of ice cream, and it wouldn't matter. It's the total that counts, and that figure may be negotiable.
Most lenders (or mortgage brokers) combine all the miscellaneous smaller charges into one origination charge because it's easier for them. It's easier for you, too, because you don't have to add up the individual items and compare them yourself.
But some charge an origination and add more charges (called "garbage fees" in the industry). That's why only the bottom line really matters. One lender might charge a 1 percent origination fee for a $100,000 loan. Another might charge $1,000 in miscellaneous fees. The bottom line is equal.
One really important thing to know about mortgage pricing is that for any given loan, the lower rate comes at a higher price. It costs lenders to "reserve" money for you when you lock in your rate, whether you close or not.
And if the rate you want is lower than the going rate (also called "par"), the lender has to pay more for it -- and so do you. For instance, as of this writing, one national lender prices a 15-year, $100,000 loan with 20 percent down like this:
- 3.50% 2.8 discount points, plus 1 percent origination
- 3.75% 1.3 discount points, plus 1 percent origination
- 4.00% zero discount points, plus .75 percent origination
- 4.25% zero discount points plus a rebate of .70 percent (you can use rebates to cover other costs, like appraisal, property taxes or insurance)
Being able to choose your price can help you get the best loan for your needs. For instance, you may need the lowest rate you can buy to even qualify for a home loan. Or you may be cash-poor and willing to pay a higher rate to avoid closing costs.
If not wrapped into the origination charge, this fee covers the cost of obtaining your documents. For example, processors may call your employer to confirm your job, send verification forms to banks to prove your assets, copy, and organize and submit your application package to underwriters. They also order appraisals, take your application, and perform other functions.
Your loan may be underwritten electronically by automated underwriting systems (AUS), or manually by a human (more common if your application requires some flexibility for approval, or if your documentation is insufficient).
Even if you get an approval from an automated system, a human underwriter must verify that, for example, your actual pay stub reflects the income that you indicated on your application. It's a labor-intensive business.
Courier fees, administrative fees, and other miscellaneous charges
You're more likely to see these wrapped into an origination charge, but if not, these charges can add several hundred dollars to your bill. And how many times does a lender in this century use a courier anyway?
Lenders can add surcharges (aka "add-ons") for higher risk transactions, or for making exceptions to their normal underwriting guidelines. For instance, Fannie Mae has an entire list of these things called the Loan Level Pricing Adjustment (LLPA) matrix. That's why, when you compare loan offers, you give every lender the same information, so that you get a meaningful quote you can compare to other offers.
For lender charges, there's only one line you need to know -- the total. Note that if your loan amount is smaller, you may pay less if the lender wraps all charges into an origination fee (usually, but not always, 1 percent of the loan amount) than you would if you paid separate fees of several hundred dollars each. On the other hand, many lenders avoid losing money on smaller loans by adding a "low loan amount" surcharge.
Third parties don't work for mortgage lenders, but they provide services necessary to complete the transaction. They can include:
Title companies, attorneys and escrow officers
Title companies or real estate attorneys check property records to make sure that the seller has the right to transfer ownership to you, or that you have the right to refinance the home. Records go back generations and are not always digitized, so this can be a time-consuming process.
Title companies first perform a title search to see if anyone has recorded claims against your property. If things look good, the title company ensures your title -- meaning that even if a long-lost heir to the home shows up or a previous foreclosure was conducted improperly, your rights are protected.
There are two kinds of policy, and mortgage lenders only require that you purchase the lender's policy, which protects the lender's collateral.
An owner's policy protects your interest in the property -- the down payment and equity you build up. Owner's policies are typically cheaper than lenders' policies because the amount involved is usually lower.
Escrow services help facilitate the transaction, receiving your borrowed funds and making payments to all parties. The title/escrow officer or attorney oversees an account containing your earnest money, down payment and closing costs, and the funds from your lender.
At closing, this person creates closing statements and distributes funds as needed -- real estate commissions to the agents, loan fees to the lender, taxes and other fees to the county, charges to third-party providers like the appraiser, and the remaining proceeds to the home seller.
While you won't always need a full home appraisal to purchase and finance your property, you most likely will. So-called "desk" appraisals may work when you are making a large down payment and the house is a brand-new residence in an established tract. Or if you refinance a $100,000 loan on a $900,000 house and have perfect credit.
Some large banks use their own in-house automated valuation systems (AVMs) and rely on these values in low-risk situations. But in most cases, you will have to pay for a home appraisal when you buy or refinance.
Appraisers use public data to check the home's sales history, pricing trends in the area, the balance between supply and demand, zoning, and other numbers that affect values. They compare the property to nearby recent sales of similar houses -- square footage, condition, site (nicer views are worth more), quality of construction, and both desirable and undesirable features that affect the property marketability if the lender has to foreclose and sell.
Appraisers add and subtract for these items and arrive at a comparable value for your home. That's not the only way to value property, but it's the most common. They can also calculate the value by looking at its potential income as a rental, or at the cost of building such a home on a similar lot. Appraisals cost a few hundred dollars to over $1,000, depending on the size and uniqueness of the home.
Credit bureaus compile your credit history from creditors, collection agencies, public records (judgments and liens) and other sources, and use their own formulas to create a credit score. The most commonly used scores in mortgage lending come from FICO. Your lender will probably pull a merged report with scores from at least two of the top three bureaus -- Experian, TransUnion and Equifax. This report costs between $20 and $60.
However, if your credit report is unusable due to identity theft or lack of information, the lender may have to commission a manual credit report -- a report compiled by humans verifying accounts like your rent, utility payments and other sources. Costs for manual reports are higher.
Flood certification indicates what level of flooding danger threatens your property. The federal government assigns flood zones to areas, and some of those are more prone to flooding than others. If you're in a flood zone, you'll have to purchase flood insurance to get a mortgage.
If your property is in a flood zone but high enough that it is not in danger of flooding, an "elevation certificate" can take the place of flood insurance. Note that an elevation certificate costs about $350, while an ordinary flood certificate costs approximately $20.
Your county charges fees to process the records ($20 to $200 or more) when a property changes hands, and you'll likely pay a tax as well. This tax goes by many names: real estate conveyance, mortgage transfer, documentary stamp, or property transfer. It ranges from zero (Alaska) to 3 percent of the property value (Delaware), according to the National Conference of State Legislatures.
If you buy in a homeowners association, you'll probably pay for a copy of the Covenants, Concessions and Restrictions (CC&Rs), a fee for the property manager to complete a condo survey for the lender, and a fee to transfer ownership records.
This is a fairly recent trend, and while the association may technically make the seller responsible for this cost, in a seller's market, it might become yours. Even if your seller pays it, understand that you'll be dealing with it in the future when you sell your home.
The tax service is not a government requirement, even though it sounds like one. Tax service companies simply keep track of your property, making sure that you pay the taxes when due. It protects the lender, and you should probably ask for a waiver if the lender will be impounding your taxes with your monthly payment.
Impounds or escrows
Impounds, also called "escrows," are not actually loan fees. They are costs of home ownership -- usually, property taxes and homeowners insurance. Many, if not most loan programs require impounds, especially if you put less than 20 percent down.
With impounds, the lender calculates your property taxes and insurance for the year, divides by 12, and adds that amount to your monthly mortgage payment. Then when taxes or premiums come due, the lender pays them on your behalf.
However, when you have impounds, the lender "front loads" the account at closing, with one year of insurance, plus a couple months' premiums, and two or three months of property taxes. That can increase your closing costs by more than you anticipated, so review disclosures carefully.
What are the average closing costs?
Average closing costs depend on the state in which you close. Some allow title insurance and escrow providers to compete for business, which reduces costs, while others do not. Some states have higher transfer fees and taxes than others.
You can find out the average closing costs for your state by hovering over your state and looking for the percentage that displays underneath Texas. Click your state to get mortgage quotes for your loan.
Here are average home closing costs by state, according to Closing.com. Note that these figures exclude mortgage lender charges, which are negotiable and depend on the loan and price you choose.
Which closing costs are negotiable?
Your ability to negotiate certain closing costs depends on the location of your property. Your Loan Estimate will detail which items you can shop around for (section C).
Mortgage lender charges
But you can negotiate lender charges anywhere. These include:
- Mortgage origination fee
- Other fees like underwriting, processing, and funding, which go directly to the lender. Don't get too wrapped up in what the fees are called; just negotiate the bottom line for lender charges.
Some fees are merely collected by the lender for required services, and can't be negotiated with the provider. These include appraisal charges and credit reporting fees.
However, the lender can cover them for you if you desire this. Note that the more fees you want your lender to cover, the higher your interest rate is likely to be.
Title and escrow charges
Other services you may be able to shop for include title insurance and escrow services. You'll want to compare charges from several companies because, in states that allow you to shop, fees and premiums can vary by thousands of dollars.
Note that if the house was purchased or refinanced within the last few years, you may qualify for a "short rate" or "discounted" premium.
If you purchase lenders and owners policies from the same provider, ask for a "simultaneous issue" discount.
In Florida, New Mexico, and Texas, title insurance charges are set by regulations. NY, PA, NJ, OH, and DE also have uniform rates. However, extra fees like mail and courier charges, copy fees, and costs for searches and certificates can be negotiated. Just call the title insurance company and ask to remove the fees, and if they refuse, look for another provider.
Title service fees show up in section B or C of page 2 of your Loan Estimate. If they appear in section C, you can shop for them -- and you should.
How to negotiate the lowest closing costs
Your mortgage lender and real estate agent probably have providers they routinely work with. These companies may also offer the best pricing. However, no one is going to care about your out-of-pocket costs as much as you do, so if you can shop for an item, you probably should.
Even where there are no differences in pricing for title, escrow and other services, you may be able to negotiate to have the mortgage lender or home seller pay them. Note that all things being equal, a loan with the lender covering your other charges will have a higher interest rate than one that does not.
How are mortgage closing costs related to your interest rate?
This is closely related to the section above. You can choose several cost structures for a given loan. That includes the loan with the lowest rate (and highest cost) and one with no charges, or even rebate pricing.
Rebate pricing allows the lender to take your mortgage rate higher in exchange for rebating an amount to you. You can use the rebate to cover other closing costs -- even impounded items like property taxes and insurance premiums.
For instance, the image below is taken from an actual nationwide lender's wholesale rate sheet a few weeks prior to this article's publication. When you see negative numbers, they indicate money that could be used to cover closing costs and impounds.
So a loan with minus three points could credit you with up to 3 percent of the loan amount for other costs. On a $200,000 mortgage, that's $6,000.
"Discount" pricing doesn't mean lower charges. It actually refers to the extra fees you might pay to "buy down" your rate. Discount points add to your closing costs but reduce your interest rate.
You can determine if this is a good deal or not by comparing the costs and monthly payment. See how long you have to keep a more expensive loan for the lower payment to offset the higher cost.
Here is an example of a $200,000 mortgage, using the rate sheet shown above, with a 1 percent origination charge.
- Rate: 4.25 percent, cost = .601 percent (1 percent origination - .399 percent rebate), payment = $984
- Rate: 4.00 percent, cost = 2.097 percent (1.097 percent plus 1 percent origination), payment = $955
- Rate: 3.75 percent, cost = 3.274 percent (2.274 percent plus 1 percent origination), payment = $926
The difference in cost between the 3.75 percent loan and the 4.25 percent loan is $5,346. That's 3.274 percent - .601 percent * $200,000. Divide $5,346 by $58 and you get a rough idea of the breakeven period for the extra fees.
The difference in monthly payment is $58. It would take just over 92 months (7.6 years) to offset the cost with a lower payment. If you don't plan to keep your mortgage that long, you'd be better off with the cheaper loan.
Shopping for a mortgage is about more than just an interest rate. By comparing the costs versus your payment, you can arrive at the best combination of interest rate and upfront costs to meet your needs.Verify your new rate (Mar 24th, 2018)
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