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Closing Costs, Prepaid Items and Escrow Accounts

You need to save for more than just a down payment when you plan to buy a home, and many of the same upfront costs apply to refinancing a mortgage as well.

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Closing Costs

Closing costs are all the fees associated with finalizing a home purchase or mortgage refinance.

All closing costs will be listed on the loan estimate and the closing disclosure.

When you complete a mortgage application, your lender must disclose a good faith estimate of the closing costs (the “loan estimate”) within three business days. Your lender must also provide a breakdown of your closing costs (the “closing disclosure”) at least 24 hours before the final documents are signed.

When total closing costs are estimated, prepaid items are often also included so you have a better idea of how much money has to be paid upfront. This category covers recurring costs like taxes and insurance that are usually handled through an escrow account.

The total amount of the closing costs for a mortgage typically ranges from 2 to 5 percent of the home’s purchase price. For example, if the home is being sold for $150,000, closing costs could total between $3,000 and $7,500.

Home Purchase Price * 2–5% = Range of Total Closing Costs Example: $150,000 * 0.02–0.05 = $3,000–$7,500

Closing costs fall into a few main categories based on who the money is paid to, but because different lenders have different policies and local laws vary widely, the names and amounts of the individual closing costs on your disclosure will depend on where you are and who you borrow from. The following list is meant to give you common examples of what to expect.

Lender Fees

Loanwise doesn’t charge all these fees!The following list is included to give you examples of common fees charged by other lenders, but at Loanwise, we pride ourselves on keeping closing costs low.

  • Origination: This is a commission that covers the cost of creating the loan. It may equal a percentage of the loan amount or a set dollar amount.
  • Application: This fee covers the processing of your application.
  • Underwriting: This fee covers the process of verifying all your financial information.
  • Document Preparation: This fee covers the administrative work involved in preparing mortgage documents.

When comparing interest rates, pay attention to the APRs, which are designed to take fees into consideration.

Discount points are also paid to the lender at closing, but they are more than just another fee. Each point you pay lowers your interest rate, saving you money in the long run.

We pride ourselves on offering both competitive rates and fewer fees.

Third-Party Fees

  • Appraisal: Your lender has an appraisal done to determine the fair market value of the home. By law, the appraiser has to be an independent third party.
  • Inspections: Local laws may require certain inspections, such as a flood determination, a lead-based paint inspection, a pest inspection, or a survey. Note that it is often recommended for a homebuyer to have a home inspection done before finalizing a sale price with the seller, but this is usually outside the mortgage process.
  • Credit check: Your lender must pay the crediting reporting agencies in order to pull your credit report. This cost is sometimes covered by the application fee.
  • Broker: If your mortgage was arranged by a mortgage broker, they will earn a commission similar to an origination fee.
  • Title search: Before the title can be transferred, a title company must search public records to confirm the property’s legal ownership.
  • Title insurance: Separate title insurance policies protect the buyer and the lender from loss or damage caused by legal claims made on the property.
  • Attorney: If a real estate attorney was hired, their fee will be included as a closing cost.
  • Courier: A fee may be included to cover the cost of transporting legal documents.
  • Closing: Regulations may require a title company, escrow company, or real estate attorney to supervise the closing, which is paid for through a closing fee.
  • Homeowner association: A homeowner or condo association may require you to pay prorated dues at closing. The seller may also be required to pay a transfer fee.

Government Fees

  • Recording: This fee is charged by the local government office for recording the transaction in public records.
  • VA funding: A VA funding fee is usually required for VA loans, though certain borrowers are exempt.
  • Sales tax: The excise tax on the sale of the home may also be labeled a “transfer” or “transaction” tax.

Prepaid Items and Escrow

Though they are not technically closing costs, these items also have to be paid at closing.

  • Interim interest: Lenders usually require the interest that will accrue between the closing date and the first mortgage payment to be paid up front.
  • Private mortgage insurance (PMI): If your down payment is less than 20 percent of the purchase price, you will usually be required to pay for private mortgage insurance, or a mortgage insurance premium (MIP) in the case of an FHA loan.
  • Homeowner’s insurance: Rather than having to set aside money for large, infrequent payments, you can spread your insurance premium across your monthly mortgage payments through an escrow account, which will require a deposit to set up. Note that you may also have to buy a separate flood insurance policy, depending on the location.
  • Property taxes: As with homeowner’s insurance, you can set up an escrow account and make small payments toward your anticipated property taxes every month instead of having to pay them all at once each year.

EscrowAn escrow account ensures your homeowner’s insurance and property taxes are paid on time without you having to worry about budgeting for large, infrequent payments. Lenders prefer this arrangement because it means they do not have to worry about taxes or insurance premiums going unpaid.

Setting up an escrow account usually requires you to make a two-month deposit. If your down payment is less than 20 percent of the purchase price, your lender may require it at closing. Even if it is not required initially, your lender may also require it later on if you fail to pay your taxes or insurance on your own.

View Sources
  1. Consumer Financial Protection Bureau. (n.d.). What Is an Escrow or Impound Account? Retrieved from http://www.consumerfinance.gov/askcfpb/140/what-is-an-escrow-or-impound-account.html
  2. BankRate.com. (n.d.). Closing Costs. Retrieved from http://www.bankrate.com/finance/mortgages/closing-costs/
  3. Zillow.com. (n.d.). What Are Closing Costs and How Much Are They? Retrieved from http://www.zillow.com/mortgage-learning/closing-costs/
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