Understanding Mortgage Closing Costs
One reason why it is sometimes difficult to calculate how much your mortgage will be is because of the closing costs associated with a home loan.
Just as your ready to finally become a homeowner, or perhaps finish up refinancing your mortgage, you will need to payoff the mortgage closing costs. These closing costs will be thousands of dollars, usually between two and five percent of the total home loan amount.
There are a few different closing cost categories, like those associated with your property, those associated with your actual mortgage loan, and those associated with title search.
These can be pretty significant when added up so it is important to save for mortgage closing costs, while also having enough for a down payment and the subsequent monthly home loan payments.
To property account for mortgage closing costs, it helps to understand everything about them.
What Are Mortgage Closing Costs?
Mortgage closing costs are the numerous fees that are required during the mortgage application and finalization process. As noted above, if you already have a mortgage that you end up refinancing, you will need to pay for the same closing costs again, which could offset the potential benefits of a mortgage refinance.
When it comes to the actual property you are looking to purchase, closing costs will be both the appraisal and inspection fees. In terms of the actual mortgage loan, associated costs are fees for the credit check, attorney, and loan origination. And for the title search, there will be a search fee and insurance for that search.
When it comes to who pays for closing costs, most of the financial responsibility will fall on you, but the home seller usually has a few fees to pay as well.
How Much Are Mortgage Closing Costs?
As noted above, mortgage closing costs will typically run the homeowner between two and five percent of the total home loan amount. So, if your mortgage totals $100,000, you could pay between $2,000 and $5,000 in closing costs.
When you originally apply for the home loan and receive a mortgage estimate and when you finally are about to close on your mortgage, your home loan lender will provide you with the closing cost details both times.
To pay for the mortgage closing costs, it is typically recommended to pay for the total amount with one lump-sum payment. However, some mortgage lenders may allow you to finance the closing costs and add it to the loan balance, but you will then have to pay interest on that.
Going the Fees Associated With Mortgage Closing Costs
There are really three main closing cost categories that you will have to account for: property-related fees, loan-related fees, and title fees.
Each of these categories then has at least a couple of fees falling under its respective umbrella.
The following fees are related to the actual property you will be purchasing:
- Appraisal fee: These are the fees associated with the lender having the property appraised to ensure that the home is worth the total home loan amount, just in case you default on your mortgage. Appraisal fees are usually around $300 to $400.
- Home inspection fee: In addition to having the property appraised, the lender also wants to confirm that the home is safe and livable. Home inspection fees are very common with government-backed loans, like FHA, USDA, or VA loans. Expect to pay between $300 and $500 for the home inspection fee.
The next fees will be those directly related to your mortgage loan and include:
- Credit report fee: This is the fee associated with the lender getting your credit report and checking your credit score, and usually costs $25 per name on the home loan.
- Loan origination fee: The loan origination fee is the main one to account for as it will typically cost about .5% of your total mortgage and covers the underwriting and processing of the actual mortgage, in addition to things like the lender attorney fee.
- Application fee: This involves the processing of the actual mortgage application and will usually tack on a few hundred dollars to the total closing costs.
Finally, there are two fees associated with the title search, including:
- Title search fee: The title search costs roughly $200 and involves confirming that the home seller actually owns the property, in addition to ensuring there are no claims or liens against the home. Title search fees can also differ by location.
- Title insurance: This is also known as a loan policy and protects the home loan lender in the event that the title search was incorrect and someone makes an ownership claim on the home after it has sold. This coverage will last for the life of the mortgage loan and can be between .5 and one percent of the total home loan amount.
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