Loan Closing Costs – What are they??

 

When purchasing a home or refinancing a mortgage, closing costs can often come as a surprise to many buyers and homeowners. These costs, typically ranging from 2% to 5% of the loan amount, cover various fees associated with finalizing the mortgage. Understanding what each fee represents can help you prepare financially and even negotiate some of the costs. Let’s break down the key lender closing costs and what they mean.

1. Loan Origination Fee

This is the fee charged by the lender for processing your loan application. It typically ranges from 0.5% to 1% of the loan amount. This fee compensates the lender for underwriting, verifying documents, and managing your loan from application to approval.

2. Appraisal Fee

Lenders require an independent appraisal to determine the market value of the home. This ensures the property is worth the loan amount. Appraisal fees typically range from $450 to $750, depending on the property’s location and complexity.

3. Credit Report Fee

Lenders pull your credit report to assess your creditworthiness. This fee, which typically ranges from $50 to $200, covers the cost of obtaining your credit history from major credit bureaus.

4. Underwriting Fee

This fee covers the lender’s cost of evaluating your loan application, verifying income, assets, and employment, and ensuring the loan meets all lending guidelines. It usually ranges from $400 to $1,250.

5. Title Search

Title Search Fee: Before closing, a title company conducts a search to ensure there are no existing liens, unpaid taxes, or legal disputes over the property. This fee typically costs between $200 and $400.

6. Escrow or Settlement Fee

Charged by the title company, attorney, or escrow company, this fee covers the administrative work involved in closing the loan. Expect to pay between $600 and $1,500 , depending on the service provider.

7. Prepaid Interest

Lenders require you to prepay interest that accrues from the closing date until the end of the first month. The amount depends on your loan size and interest rate.

8. Property Taxes & Homeowners Insurance (Escrow Deposits)

If your lender requires an escrow account, you’ll need to prepay several months of property taxes and homeowners insurance at closing. This ensures you have enough funds to cover these expenses when they become due.

9. Recording Fees

Local government agencies charge a fee to record the mortgage and deed in public records. This fee varies by county but typically ranges from $50 to $100.

10. Discount Points

Discount points are optional fees paid upfront to lower your interest rate. One discount point usually costs 1% of the loan amount and can reduce the interest rate by about 0.25%. If you plan to stay in your home long-term, buying points may be a cost-effective strategy to save on interest over time.

11. Title Insurance

This is not required but it is recommended and protects your interest in the property. Expect to pay between $800 and $1,600, depending on the state and service provider.

How to Reduce Closing Costs

• While closing costs are a necessary part of the home-buying process, there are ways to minimize them:
• Shop Around: Compare lenders to find the most competitive fees.
• Negotiate with the Lender: Some fees, such as origination fees, may be negotiable.
• Ask for Seller Concessions: In some cases, sellers may agree to cover part of the closing costs.
• Look for Lender Credits: Some lenders offer credits in exchange for a slightly higher interest rate.
• While the best rate is important, local lenders have better knowledge of our area and sometimes this makes the process much simpler.

Final Thoughts

Understanding lender closing costs can help you budget effectively and avoid surprises on closing day. Before committing to a loan, ask your lender for a Loan Estimate, a document that outlines all anticipated closing costs. This transparency will allow you to make informed financial decisions and possibly save money. These costs are of course are estimates. However, they might help to give you an idea of the cost and what each one represents. If you have any questions about closing costs or the home loan process, feel free to reach out. I’d love to help guide you through the journey!

Kristi Watkins

Columbus Georgia Real Estate