Home Mortgage Closing Costs Explained

Do you understand home mortgage closing costs? Do you know what is included in these fees? Let’s look at an example of real life mortgage closing costs and what these fees cover.

I love using real numbers to show how much things like real estate cost because it’s helpful for new home owners and soon to be first time home buyers. I hope this helps!

$235,000 House Closing Costs Example

Do you know how much someone pays in closing costs when they buy a house for $235,000? In this video example I show you the real life example of $235,000 house closing costs explained.

In the video above I share the real life loan paperwork for a house purchase of $235,000. The purchase price of the home was $235,000 but getting a mortgage is not free – there are costs.

Here are the purchase details of this house:

• $235,000 home purchase price
• $11,750 down payment
• Conventional mortgage loan
• 4.375% interest rate on the mortgage loan
• Home is located in Tennessee
• $6,818 in closing costs

Watch the video to see all the details from the paperwork and what they mean.

Home Mortgage Closing Costs Explained

I often get asked to explain closing costs whenever I share mortgage related videos on YouTube. People want to know:

• what are closing costs?
• how much is closing on a house?
• what is included in closing costs?
• can you save money on closing costs?
• what are all these random fees?

Obviously there is a lot of confusion about closing costs. If you don’t work in the real estate industry this can seem like a confusing mess of terms and fees, but the reality is pretty simple.

Let’s break it down.

Closing costs are the fees and charges due at the closing of a real estate transaction like buying your home.

These closing costs can include fees related to the creation of the loan (origination) and the process the company goes through to guarantee you can pay the loan (underwriting).

Closing costs can be for both buyers and sellers. The closing costs must be disclosed and clear in advances of the deal being completed. You should always know what the closing costs will be before you complete the home purchase.

What Are Typical Home Mortgage Closing Costs?

Once you understand what closing costs are for a house you likely want to know what typical closing costs are for homes.

Closing costs will depend on the home’s purchase price. They are typically between 3% – 6% of the home’s purchase price.

The factors that will influences your closing costs include:

• your state
• the type of loan
• your mortgage lender

Different loans will have larger closing costs and closing costs will vary between lenders. This means you should shop around for mortgage lenders to get the best deal.

So what are the average closing costs in the US?

Homebuyers in the U.S. pay $5,749 for closing costs on average, according to a 2019 survey from the real estate closing cost data firm ClosingCorp.

Since your individual closing costs will be different based on many factors you will have to check your loan estimate for detailed information on your closing costs.

Your lender legally must provide you with a closing disclosure form three days prior to closing. This allows you to compare the estimated closing costs they originally provided against the final closing costs. You can see how they

rose or areas where you were able to save money.

Fees Included In Mortgage Closing Costs

While your individual closing costs will be unique to your home purchase price you are able to educate yourself about typical closing cost fees.

Here are some standard fees you will see in most home mortgage closing cost explained:

Application Fee

The lender may charge a loan application fee in order to process your mortgage application. This is something you should ask the lender about before applying for a mortgage with them.

Attorney Fee

The real estate attorney will charge a fee to prepare and review your home purchase contracts. This is required in some states but not all so check your state to see if an attorney is required to handle a real estate transaction.

Closing Fee

The closing fee, which is also known as an escrow fee, is paid to the party who handles the closing. This will vary depending on your state so the closing fee could go to a title company, an escrow company, or an attorney.

Courier Fee

With the changes in 2020 this one is less common because most transactions are digital. However, if you’re signing paper documents this fee helps speed up their transportation to the correct location.

Credit Report Fee

Lenders have to pay to pull your credit report for the loan and sometimes they will charge this fee back to you. However, since lenders often get a discount from the three main reporting bureaus they sometimes do not charge you.

Escrow Deposit

You will likely have to deposit something to start your escrow account which pays your property tax and mortgage insurance. The amount will depend on your lender but could be two months of property tax and mortgage insurance payments.

FHA Mortgage Insurance Premium

If you are getting a FHA loan then you will have to pay upfront mortgage insurance premium of 1.75% of the base loan. This will be something you can roll into your mortgage. (It’s something we paid on our FHA mortgage for our starter home.)

Flood Determination & Monitoring Fee

This fee goes to a certified flood inspector to determine whether your property is in a flood zone. If it is in a flood zone then you have to purchase flood insurance separately from your homeowner’s insurance policy. This fee also includes ongoing monitoring of changes to the property’s flood status.

Homeowners Association Transfer Fee

This fee will only apply if you buy into a community that has an HOA. This transfer fee covers the switch in ownership and any work done for this transfer.

Homeowners Insurance

When you buy a home you will need homeowner’s insurance. Your lender will likely require prepayment of the first year’s homeowners insurance premium at closing.

Lender’s title insurance

This is an upfront, one-time fee paid to the title company that protects a lender if an ownership dispute or lien arises that was not found in the title search.⁹

Points

Points are an optional upfront payment to the lender to reduce the interest rate on the loan. These “discount points” result in a lower monthly payment. This doesn’t save much money when mortgage rates are very low so you’ll need to do the math to determine if it is worth doing. (The video above shows a loan with points paid in the closing costs.)

Owner’s Title Insurance

Buying a title insurance policy protects you if someone challenges your ownership of the home. This is an optional fee in your home mortgage closing costs but it’s something you’ll be glad you have if the unthinkable happens. It’s highly recommend by legal experts and costs 0.5-1% of the home purchase price.

Origination Fee

Your lender will charge an origination fee to cover the administrative costs to process and create your loan. Some lenders won’t charge this fee and make money in other ways so consider it carefully when shopping for lenders because many might have a higher rate if they don’t include this fee.

Pest Inspection

A pest inspection fee covers the cost of a professional pest inspection for termites, dry rot, or other pest-related damage. This may or may not be required based on your loan and your state. It’s not expensive and can be helpful even if not required.

Prepaid Daily Interest Charges

During the period from closing to your first mortgage payment your loan will be accruing interest. This closing cost covers any of the interest on your mortgage during this period.

Private Mortgage Insurance (PMI)

When your down payment is less than 20% you sometimes are required to have private mortgage insurance. This protects the lender in case of you defaulting on the loan. You might have to make. the first month’s PMI payment at closing.

Property Appraisal Fee

Your home will need to be appraised in order to get a mortgage and this fee is paid to the professional home appraisal company. This covers the assessment of the home’s fair market value.

Property Tax

At the closing of your property you will pay any pro rata property taxes due from the date of closing to the end of the tax year.

Rate Lock Fee

Sometimes you will pay this fee to a lender for guaranteeing a certain interest rate for a limited time period. Some lenders offer a rate lock to customers for free.

Real Estate Commissions

This fee is generally the biggest one for sellers since buyers don’t typically pay this fee. The real estate commission charged by a broker is usually 5-6% of the home’s purchase price. That amount is split between the seller’s agent and buyer’s agent.

Recording Fee

To create the official public land record the local recording office will charge a recording fee. This usually goes to a city clerk’s office or a county clerk’s office and is minimal.

Survey Fee

This fee goes to a surveying company who will check property lines and shared fences to confirm a property’s boundaries. It’s similar price wise to an appraisal fee but can be higher if the property is larger or has unusual boundary lines.

Tax Monitoring & Tax Status Research Fees

Someone has to monitor property tax payments to notify the lender of any potential issues. This fee goes to a third party to accomplish this and the fee will depend on location and the company employed.

Title Search Fee

The title search fee is charged by the title company in order to look through public property records for ownership discrepancies. For a couple hundred dollars the title company will search deed records to make sure there are no outstanding disputes or liens on the property.

Transfer Tax

This fee depends heavily on location and the cost will vary as well. The transfer tax can occur when the title is handed from the seller to the buyer.

Underwriting Fees

A lender charges underwriting fees for the work they do to evaluate your application, verify your financial information, and approve your mortgage loan. This fee will vary depending on your lender.

VA Funding Fee

This fee only applies for VA borrowers and is charged as a percentage of the loan amount. The amount of the VA funding fee will depend on your military service classification and the mortgage loan amount. Some military members are also exempt from paying the fee.⁹

Those are the most common fees and items included in a mortgage closing costs. However, there may be more so read your paperwork and ask your lender questions!

First Time Home Buyers

Buying a house for the first time can be incredibly overwhelming. You have a lot of terminology to sort through and you “don’t know what you don’t know” about buying a house.

Hopefully you have a good team to guide you through the process as a first time buyer.

Here are some helpful posts to help you as well:

• First Time Home Buyer Tips
• 4 First Time Home Buyer Mistakes We Made
• Buying Our First House – Price & Mortgage Details

Those posts give you a few ideas on what to do and what NOT to do when you are buying your first home. I hiope this helps you!