Alright, When you deal with worlds of loans, Mortgage closing costs are an important element of securing a loan. Whether you are buying a new property or refinancing property, you will need to pay these fees. Closing costs usually hover around 2% to 5% of your property’s purchase price; if you buy mortgage insurance, the costs may soar even higher than expected!
While these costs can be significant, many ways exist to reduce or avoid them. In this article, we will dive into what mortgage closing costs are, how much you can expect to pay, and, most importantly, how to minimize these fees. We will also review some of the best mortgage refinance lenders of 2023 that can also help you in the coming year, 2024.
Key Takeaways
- Mortgage Closing costs usually hover around 2% to 5% of your property’s purchase price.
- How to Reduce or avoid these fees by negotiating with your lender
- Consider working with one of the best mortgage refinance lenders of 2023 when refinancing.
What Are Mortgage Closing Costs?
Mortgage closing costs are the expenses incurred by the buyer when closing a real estate transaction. These costs include attorney’s fees, application fees, and discount points, if only applicable. In addition to these expenses, real estate sales commissions and taxes can add up to 15% of the property’s purchase price. While the seller is responsible for some of these fees, such as the real estate commission, the buyer is responsible for other closing costs. The buyer must understand the closing cost types and negotiate them whenever possible.
Best Mortgage Refinance Lenders of 2023
Looking for a mortgage refinance lender? Here are some top options for 2023:
- Flagstar Bank
- Quicken Loans
- LoanDepot
- U.S. Bank
- Better.com
While choosing a lender, you must consider factors such as interest rates, loan types, APR, and financing options. Additional options include FHA, USDA, VA, and conventional loans. A mortgage broker can also help you find the best lender for your needs.
Remember to compare loan offers and negotiate terms to get the best deal possible.
How Much You’ll Pay in Mortgage Closing Costs
Closing costs for a mortgage vary widely depending on a few factors, such as the purchase price, your loan type, and the lender. On average, Closing costs typically range from 2% to 5% of the purchase price.
Buyer Mortgage Closing Costs
Buyer Mortgage closing costs generally include:
- Lenders charge 1-2% of the loan amount for loan origination, which includes fees of $750-$1,200.
- Loan underwriting fees can cost you $1,000 or more for inspection, appraisal, survey, and title work.
- If the buyer pre-pays interest, they can lower their interest rate by earning one or more mortgage discount points.
- Up to 2% of loans for insurance or government loans. (such as an FHA loan) that requires it)
Buyers can estimate their closing costs using a closing cost calculator, which considers the purchase price, loan amount, and other factors. The lender must provide a loan estimate outlining the estimated mortgage closing costs within three days of receiving a mortgage application. The closing disclosure, which provides the final closing costs, is provided to the buyer at least three days before closing.
Seller Mortgage Closing Costs
Sellers typically pay real estate agent commissions and prorated and transfer taxes. In some cases, sellers may also pay for a home warranty (if they’re providing one) and fees for any associations that their property belongs to. Other costs, such as real estate commissions and title preparation fees, can be negotiated between you and the seller. That’s right! So feel free to speak up and see if you can get a better deal.
Mortgage Insurance Requirements
Remember, If the buyer decides to use insurance or a government-issued loan (such as an FHA loan) that requires it, they may be required to pay an initial mortgage insurance premium of up to 2% of the loan amount. The premium can be paid upfront or rolled into the mortgage payment.
Mortgage Rates for First-Time Homebuyers
First-time homebuyers may qualify for lower mortgage rates, which can lower their overall closing costs. However, comparing rates from various lenders is essential to ensure you’re getting the best deal.
Remember the closing costs as you gear up to buy your dream home! They usually hover around 2% to 5% of your property’s purchase price. This is an essential consideration for any home buyer. So, ensure you budget accordingly to avoid any last-minute surprises and make the process as smooth as possible. Origination points, loan underwriting fees, mortgage discount points, and mortgage insurance premiums are included. Sellers pay agent commissions, taxes, and transfer taxes.
How to Reduce or Avoid Mortgage Closing Costs
Closing costs can be a significant expense when buying a property. While it is not possible to eliminate them entirely, there are ways to reduce or avoid them. Here are some strategies:
Negotiate with the Seller
One way to reduce closing costs is to negotiate with the seller. You can ask the seller to pay for some or all of the closing costs. This can be done by making a lower deal on the property and asking the seller to use the savings to pay closing costs. It is important to note that not all sellers are willing to do this, and it may not be possible in a competitive market.
Use Down Payment Assistance Programs
Another way to reduce closing costs is to use down payment assistance programs. These programs are formed to help buyers with the upfront home costs. They may provide grants or loans to cover some or all down payment and closing costs. These programs may have income and credit requirements, so it is essential to research them and see if you qualify.
Pay Cash for the Home
Paying cash for a home is not an option for most buyers, but it can significantly reduce closing costs. Buyers who pay cash do not need a loan, which means they do not have to pay loan origination fees, appraisal costs, and other fees associated with obtaining a loan.
Go Without a Realtor
Purchasing a property directly from the owner enables buyers to save on commission fees that would have been paid to the real estate agents. This can reduce closing costs significantly, but it is essential to understand that buyers won’t have the guidance and support of a real estate agent throughout the buying process.
Use Seller Financing
Seller financing is when the seller acts as the bank and holds a mortgage for the buyer. This can eliminate some of the fees associated with obtaining a loan, such as origination and appraisal costs. However, buyers should still have the property inspected before closing to ensure that it is in good condition.
Avoid Discount Points
Discount points are prepaid interest on a loan that can lower the interest rate and the total interest paid over the life of the loan. However, they can also represent a significant upfront cost. Buyers who want to avoid paying discount points can look for lenders who do not require them.
Avoid Mortgage Insurance
Buyers who make a down payment of at least 20% do not have to pay for mortgage insurance. Buyers who cannot make a 20% down payment may have to pay for mortgage insurance, which can increase closing costs. FHA and USDA loans require mortgage insurance, which is included in their loan programs.
Roll Mortgage Closing Costs into the Loan
Buyers can sometimes roll some of the closing costs into their loan, which can reduce the upfront cost. However, this will increase the total mortgage cost, as buyers will pay interest on these expenses over the life of the loan. It is important to research which costs can be rolled into the loan and to calculate the long-term cost of doing so.
What is Included in Mortgage Closing Costs?
When a property is sold, there are certain expenses that the buyer and seller need to pay. These expenses are known as closing costs and are typically paid when closing. The charges can differ based on the transaction but usually include various fees and costs. Some of the most common ones include:
Appraisal Fee
An appraisal fee is a fee paid to an appraiser to determine the value of a property. When a buyer gets a mortgage on a property, their lender wants to ensure it is worth more than they’re lending against it. If the buyer defaults on the loan, the lender must sell the property to recoup their money. Appraisal fees may be paid separately or added to the loan balance.
Inspection Fee
Before a lender issues a loan, they want to ensure that the property they’re lending against is in good shape and not damaged by termites or water. A home inspector is hired and paid an inspection fee to check the property’s condition. The payment for the inspection fee can be made separately or added to the buyer’s loan balance.
Loan Origination Points
Borrowers may be required to pay loan origination points when obtaining a loan. These fees can include the loan origination fee (typically a fixed amount), application fees charged by some lenders, and other costs like loan broker fees and additional charges levied by lenders.
Mortgage Discount Points
Mortgage discount points refer to fees that borrowers pay to reduce their interest rate. This is achieved by prepaying a portion of the interest due over the life of their loan. Typically, for every 1% of interest that is prepaid, borrowers can expect a reduction in their interest rate for the duration of their loan of approximately 0.25%.
Mortgage Insurance Premium
Mortgage insurance premiums are fees borrowers pay when they make a down payment of less than 20%. If a borrower wants to get a loan from lenders, they will be required to buy private mortgage insurance (PMI), which may involve upfront premium payments. Government loans like FHA or USDA also require borrowers to pay premiums for mortgage insurance provided by those programs.
Prorated Real Estate Taxes
When a property is sold, the seller is responsible for paying the prorated real estate taxes for the time they owned the property. The new buyer will be responsible for paying the whole year’s worth of property taxes when they receive their next tax bill. Essentially, prorated real estate taxes ensure that the seller only pays taxes for the period they owned the property while the buyer takes on the responsibility of delivering the total amount of taxes for the year moving forward.
Real Estate Commissions
When a property is listed for sale, the seller is required to pay real estate commissions. These fees are usually a minimum of 5% to 6% of the purchase price but can be higher than 10%, depending on the type of property and broker involved.
Recording Fee
When property ownership is transferred, a new deed needs to be filed with the county recorder’s office to record the change in ownership. This document serves as evidence of the property’s new ownership and is known as a recording. Counties usually levy a modest fee for recording a new deed, and it is commonly referred to as the recording fee.
Stamp Tax
Stamp tax, also known as transfer tax, is a tax that becomes due when there is a change in the ownership of real property from a seller to a buyer. Although the amount of this tax is generally small, in some areas of the country, it can be pretty substantial.
Survey Fee
A survey fee is a payment made to a surveyor to accurately outline the dimensions of a property and create a map that outlines legal boundaries as well as land features. Surveys are necessary when a property has not been surveyed in a while or is unclear from previous deeds. They are also required when an individual is buying a portion of a parcel or purchasing multiple packages that may be combined as part of the sale.
Title Fee
When you purchase a property, you may be required to pay a title fee to an attorney or title company. This fee is charged for checking the property title, which involves verifying that the seller can legally transfer ownership and there are no outstanding liens or other encumbrances. The attorney also prepares a new deed as part of the sale. The cost of these services typically ranges from a few hundred to a few thousand dollars, depending on the state where you reside.
Title Insurance
Title insurance is a type of insurance that protects the buyer in case any issues related to the property title arise before or after its purchase. In case of fraudulent activity, such as someone trying to claim ownership of the property, title insurance will cover the expenses incurred to rectify the issue. This ensures the buyer is protected against unforeseen errors or problems related to the property title.
The Bottom Line
When purchasing a property, it’s important to remember that mortgage closing costs can be significant. It may differ based on the property type, whether financing is involved, and the purchase agreement details. Although the seller typically covers some of these fees, buyers should be prepared to pay upfront between 2% to 5% of the total purchase price as closing costs. Awareness of these costs is essential as they can significantly impact the total amount a buyer must pay.
