Mortgage closing costs explained: a guide for home buyers
Mortgage closing costs are fees that, for many, make the mortgage even more complicated. Other buyers are surprised by these.
However, at the end of this post, you will be part of a third group: the buyers who know how to reduce this fee as much as possible or even avoid it! For that, see this post until the end.
What are mortgage closing costs?
Mortgage closing costs are the expenses a borrower must pay when closing a mortgage loan. These costs are paid at the end of the mortgage application process.
Thus, you will be faced with them when agreeing, with the lender, the details of the loan and the transfer of ownership of the property. That is, right after signing the mortgage papers.
The exact amount of closing costs can vary depending on the terms of each loan. However, mortgage closing costs generally range from 2% to 5% of the total mortgage amount.
What do mortgage closing costs include?
In fact, mortgage closing costs are actually a set of individual fees. Below are the main ones:
- Loan Origination Fees: This is a fee charged by the lender for offering the loan;
- Appraisal Fees: This is the cost of having the property appraised by an expert to determine value;
- Home inspection fee: refers to the cost of inspecting the property to detect possible problems;
- Prepaid expenses: property taxes, homeowner’s insurance, and prepaid interest;
- Custody Fees: Fees charged by the companies holding the funds until all sale details are finalized;
- Title Search and Insurance Fees: These fees cover the cost of verifying ownership of the property and obtaining title insurance to protect against potential legal claims;
- Legal Fees: This is the cost of having an attorney review the mortgage documents and provide legal advice;
- Registration Fees: Covers the cost of registering mortgage documents with the county or city notary;
- Transfer Taxes: These are taxes levied by some states or municipalities on the property transfer.
Who pays for mortgage closing costs, the buyer or the seller?
Typically, the buyer is responsible for paying the mortgage closing costs. This is because these costs are fees charged to obtain a mortgage loan.
In this way, they are part of the credit service that the buyer is contracting. However, in some cases, the seller may agree to pay these costs in full or in part.
By the way, these details can be discussed during the negotiation process to choose the best type of mortgage. Indeed, this type of practice is called “seller concession” or “seller contribution.”
Additionally, some loan programs allow the borrower to finance the closing costs of the loan amount.
In this way, instead of paying them in full, the value of this cost is divided into mortgage installments. This payment method is called a “no closing cost mortgage.”
However, in this case, the borrower may pay even higher costs. After all, by adopting this practice, they will incur interest on closing costs.
Therefore, borrowers must understand their options for paying these closing costs.
In addition, you need to carefully calculate your estimated closing costs and ensure that you have sufficient funds to cover these expenses.
Are there any ways to reduce or avoid mortgage closing costs?
Indeed, there are strategies by which you can reduce or avoid mortgage closing costs. Below, learn about the methods most recommended by specialists in mortgage management.
Negotiate with the creditor
Borrowers can ask the lender to waive or reduce some of the fees. For example, you can negotiate with the lender to reduce the application or origination fees.
Some creditors may be willing to listen to proposals and close deals. This strategy is more likely to work with a strong credit history.
If this is not your case, check the possibility of offering a good advance on the loan amount.
Search a lender
In effect, you can compare offers from various lenders to find the best deal on closing costs.
It’s important to compare not just the interest rate but closing costs as well. After all, some lenders may offer a lower interest rate but higher closing costs.
Look for government assistance programs
Some government programs like VA loans or FHA loans offer lower closing costs. So, check if you are eligible for any of these possibilities.
Consider a no-closing-cost mortgage
Some lenders offer a mortgage with no closing cost. However, this usually results in a higher interest rate or larger repayment installments.
Ask the seller to contribute
Sometimes, the seller may agree to pay some or all of the closing costs. As we have already said, these conditions can be defined during the negotiation process.
You will still need to pay certain expenses if you reduce these costs or manage to eliminate them. For example, you must still pay prepaid expenses and government fees.
Additionally, borrowers need to review each mortgage offer carefully. Finally, it is extremely important to know all types of mortgages to make sure you choose the best option.
We are sure this post brought you closer to fulfilling the dream of owning your home. Be sure to take advantage of other content on this site about mortgages and finance.
