Mortgage Closing Costs: What Every Homebuyer Should Know

Mortgage Closing Costs: What Every Homebuyer Should Know

You have a lot to think about if you’re planning to purchase a new home. In addition to considering the mortgage payment you can you afford, your down payment amount, where to buy, and the style of the house you want, it’s also essential that you think about closing costs.

Closing costs are fees beyond the purchase price that must be paid when you close on your mortgage loan, hence the name. But what exactly do closing costs cover and how much will you be required to pay?

Understanding What Closing Costs Cover

Closing costs include important aspects of your home purchase, many of which help protect your investment. Here are the common fees included in your mortgage closing costs:

Home Appraisal
Your mortgage lender will hire an appraiser to determine the property’s market value. This ensures that the real estate you are purchasing is worth what you are borrowing.

If you’ve heard of someone being “upside down” in their home, it means the current appraised value of the residence is less than the money owed on their mortgage. This usually happens when markets suffer major fluctuations, causing property values to decrease.

Title Search
Another way your lender protects your purchase is by initiating a title search. A title search looks for liens against the property and legal issues that could haunt you after the purchase of your home.

A common example is when the current or previous owner failed to pay property taxes on the home. The local municipality may file a lien that could transfer to you as the new buyer, making the unpaid property taxes your financial responsibility. Thanks to your lender’s title search, you can uncover issues like these and resolve them before you agree to buy a home.

Title Insurance
Title insurance is an additional component of closing costs, and it provides important protection for buyers against unforeseen legal disputes or ownership challenges.

When you purchase a home, you receive a document called a “deed” that verifies the seller transferred their legal ownership, or “title” to their home, to you. In the future, if someone sues, saying they have a claim against the home prior to your purchase, title insurance can protect you. Examples include legal claims from a previous owner’s failure to pay taxes or from contractors who say they were not paid for work done on the home for the previous owner.

Application Fees
Your lender is legally required to verify the information you provide on your mortgage application. This is part of the underwriting process and often requires work with third parties who charge for their services. Your lender often transfers this fee to you, and it will be declared as part of your closing costs.

Taxes and Insurance
The final portion of your closing costs pertains to property taxes and homeowners’ insurance. Because these fees are required by local governments, you will be asked to pay them up front at closing.

Answering Common Questions About Closing Costs

Now that you understand the elements of closing costs, here are questions you may be pondering:

How much will my closing costs be?
Mortgage closing costs typically run between 2% and 6% of the loan amount. However, your mortgage lender can provide a more accurate estimate based on your situation and credit score.

Why do closing costs vary from one lender to another?
When comparing closing costs, you might find that they differ between lenders. That’s because each lender has its own fee structure and uses different vendors. When shopping for a mortgage, you should assess lenders based on their interest rates and expected closing costs to determine who is offering you the best deal for the long term, or for your present financial position.  

Can my closing costs be financed as part of my mortgage?
In most cases, financing your closing costs isn’t advantageous.

For example, if you’re required to put down 3% of your purchase price to be eligible for a mortgage, rolling in the closing expenses will end up costing you more than you would pay out of pocket and could impact your eligibility for the loan. By rolling closing costs into you’re your mortgage loan, you’ll be paying interest on the closing costs through the life of your loan, which will cost more in the long run than if you pay those closing costs up front.

If you’re worried about coming up with the cash you’ll need at closing, be sure to speak to your loan officer who can help you understand the best options.

Why do some lenders offer mortgages with no closing costs?
If a lender is offering a loan with no closing costs, beware. It likely means you are being charged a higher interest rate to cover the costs. In the end, you’ll end up paying more over time than if you pay the closing costs up front.

Closing Thoughts on Closing Costs

While bringing a check to closing can be a stretch for some buyers, it’s important to understand and prepare for these costs before you find and fall in love with a home.

Your closing costs cover critical services and protections. Familiarizing yourself with the additional expenses and thoughtfully budgeting for them will help you navigate your homebuying journey with knowledge and confidence.