What Are Closing Costs And How To Cut Down Fees and Title Charges?

Closing Costs
Gustan Cho Associates

What Are Closing Costs?

On every mortgage transaction, there are closing costs associated with the transaction.  Whether they are home purchase mortgage loan transactions or refinance mortgage loan transactions.  Many first time home buyers do have a grasp on the down payment required but many have a hard time understanding closing costs and have a hard time justifying paying closing costs.

Basically, closing costs are any costs that is associated with the orgination and closing on the home loan.  On a purchase mortgage loan transaction, closing costs will include both fees and costs of the mortgage loan origination such as origination fees, credit report fees,  pre-paids, points, as well as the cost of the real estate transaction such as attorney’s fees, appraisal fees, home inspection fees, other inspection fees, homeowners insurance, and other fees and costs with the purchase and origination of the mortgage loan.  Many home buyers do not have to worry about closing costs because closing costs can be covered by a home sellers concession or a mortgage lender credit.  Closing costs are not as bad as home buyers and/or homeowners refinancing their mortgage may think.  It is very manageable and can be covered by the mortgage lender in lieu of a slightly higher mortgage rate.

Basic Breakdown Of Closing Costs

Every real estate transaction can have different closing costs. There is no set formula like if you purchase a home for $100,000, then your closing costs will be 2% of the purchase price of the home.  Closing costs vary depending where the property is located at.  It depends on the state and the county the property is located.  The two categories of closing costs are the fees and costs of the mortgage lender and the fees and costs the county where the property is located charges.  Here are some basic costs associated with obtaining a mortgage loan.

  • Credit Reporting Fee:  A credit reporting fee will be charged at closing.  When a mortgage company pulls your credit at the time of your mortgage application, the mortgage lender will not charge you the credit reporting fee upfront.  They will cahrge the credit reporting fee at closing.  If you do not proceed with the mortgage application and closing process then there is no charge and the mortgage company needs to absorb the credit reporting fee.
  • Origination Fee:  Mortgage brokers need to charge a loan origination fee for their services.  Yield Spread Premium is what mortgage brokers make for their commission and is often referred as YSP.  The Yield Spread Premium is part of the Origination fee.
  • Attorney Fee:   Many states like Illinois, both buyers and sellers are represented by real estate attorneys.  Attorneys fees are part of the closing costs.  Average real estate attorneys charge around $500 for real estate purchase transactions.
  • Home Inspection Fee: A Home inspection is not required by mortgage lenders but it is highly recommended for home buyers in the event if there are hidden issues such as mold, foundation defects, or other issues that cannot be detected by the average person.
  • Discount Points:  Discount points are upfront fees paid by the mortgage loan borrower to get a lower rate.  Discount points can be paid by a sellers concessions.
  • Underwriting Fee:  Many mortgage lenders charge underwriting fee.  Average underwriting fee charged is close to $1,000.
  • Recording fees:  There will be recording fee charges by the county you bought your home at.
  • Pest Control Fee:  Pest control inspection fee is optional but it is up to the homeowner whether or not to hire a pest control inspector or termite inspector.”
  • Appraisal Fee:  Appraisal is required on all mortgage loan transaction and an appraisal needs to be paid by the home buyer.  Appraisals for single family homes are normally under $500 dollars.
  • Survey Fee:  PSurvey fees are part of closing costs. Either the seller pays for it or the buyer pays for it or sometimes it may be split between the buyer and seller.
  • Title Search Fee: Title search fee will required to do a thorough background check on the  title of the property to make sure there are no liens on the property and the title to the property is not clouded.
  • Title Insurance: Title insurance is required to make sure the title is free and clear of any liens and there are title charges for both the buyer and seller which is part of closing costs.

What Are Average Closing Costs?

As mentioned earlier, closing costs vary depending the state and county the property is located.  Average closing costs is between 2% to 3% of the home purchase price.  Sellers concessions is allowed where the home seller will pay the buyer’s closing costs.  FHA allows up to a 6% sellers concession towards a buyers closing costs, VA loans allow up to 4% sellers concessions towards buyers closing costs, and conventional loans allow up to 3% of a home buyers closing costs for primary residences and 2% sellers concessions for investment homes.

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