What are Mortgage Closing Costs and Who Pays Them?

They are no fun, but mortgage closing costs are a big part of the actual cash investment when you buy a home. They will typically run you between 2% and 5% of the loan amount. There are a menagerie of costs associated with the process of closing a mortgage loan and there are different ways to pay for them.

The most basic way that they are paid is from your bank account at closing.  But who wants to do that?  Here are some other ways to cover those pesky mortgage closing costs:

• Seller Paid Closing Costs – In some markets, the buyer may be able to get the seller to pay some of the closing costs associated with the loan.  These can be negotiated as a percent of the loan amount or as a finite dollar amount.  Different loan programs and the amount of your down payment can affect the maximum costs that the seller can pay, so check with your lender for specifics.

• Lender Paid Closing Costs – Your lender can pay some of your closing costs for you.  You may hear some lenders advertise “no closing cost” loans, but this is slightly misleading.  When you lender pays closing costs for you, they raise your interest rate and give you a credit for taking the higher than normal interest rate.  This can be useful, but make sure you discuss the specifics with your lender.

• Rolling Into The Loan – This is an unusual way to pay closing costs and can only be done in one specific situation: You must be qualified for a USDA Rural Development loan and your home must appraise for more than the sales price.  If that does occur, you can finance your closing costs into the loan amount up the appraised value of the home.

Now, let’s take a look at the different types of mortgage closing costs you may see on a loan estimate:

Bank Origination Charges – these costs are what a bank or mortgage company charges you to process and underwrite your loan.  Typically, these charges are what help to pay the processors and underwriters that do all the back-end work to complete your loan application.

Discount Points – These are percentage points of the total loan amount that you pay to “buy-down” the interest rate.  These costs are specific to your lender and can vary wildly, so it’s important to talk to him or her about what these costs will get you in an interest rate discount.

Homeowner’s Insurance – Your first year’s premium for homeowner’s insurance is included in your closing costs as well.  It is very important to start getting quotes from your favorite agents once you identify a property because premiums will vary depending on the agent.   Not only will that premium affect your closing costs, but it will also affect your monthly payment!!  Also, be sure to include flood insurance if your home is located in a flood zone.

Daily Interest – You will prepay the daily interest charges for the money you borrow on the day of closing for the remainder of the month in which you close.  For example (in a month with 30 days), if you close on the 10th of the month, you will have to pay 20 days of interest.  If you close on the 15th, you will pay 15 day of interest and so forth.

Escrow Deposits – Banks require that you prepay a few months’ payments of taxes and insurance. This is required so that you will have enough money in your escrow account when your taxes come due to make the full payment and so that there is enough money in your escrow account in case your homeowner’s insurance premium increases.

Attorney Fees – The real estate attorney who researches the title on your property and conducts your closing will charge you for their services.  There are some standard fees they charge everyone and then there are title insurance costs that are a percentage of your loan.

City, County and State Taxes & Recording Fees – Your state and local government will also get their cut from your transaction.  They charge to record your security deed and to transfer the property.  Most of these costs are percentages of your loan amount.

This is not an inclusive list and there could be other mortgage closing costs, so call me and let’s discuss your situation!  If you are interested in applying for a loan, click Apply Now to start today!