From Closing Costs to Junk Mortgage Fees: What to Know When Purchasing Real Estate
Pay attention to closing costs and others fees to save money when you close on real estate
Most people have relatively few opportunities to learn the ins and outs of purchasing and selling real estate. Between the viewings, inspections, meetings, and paperwork, it is not difficult to lose sight of what you are paying for and how much you are paying for it. Most expenses other than the mortgage are lumped into a category known as "closing costs." You can save hundreds to thousands of dollars if you pay attention to these closing costs and understand exactly where your money is going.
What Are Closing Costs?
The term "closing costs" refers to the total cost of several dozen possible expenses related to buying and financing real estate that are paid at closing. These expenses, in turn, can be classified either as "recurring" or "nonrecurring."
Recurring Closing Costs
Recurring closing costs include real estate taxes, homeowners' insurance, and private mortgage insurance. This type of cost is paid not just at the time of closing, but every month thereafter as well. They may have to be paid in advance at the time of purchase, a process also known as putting the funds in escrow. This is done by depositing the funds into an account so they will be available to cover future expenses. It could also be necessary to pay interest in advance to cover the first several days or weeks in your new home depending upon your closing date.
Nonrecurring Closing Costs
Nonrecurring closing costs are also paid at the time of closing. They can include:
- An application fee (lender profit)
- A series of loan fees (e.g. an origination fee, appraisal fee, credit report fee, tax service fee, underwriting fee, document preparation fee, wire transfer fee, office administration fees, etc.)
- A service fee for the broker, if a broker is being used
- Any home inspections required by the lender (e.g. pest inspections, radon inspection)
- An appraisal required by the lender (meaning a third party is paid to verify that the property is worth at least as much as the selling price)
- Federal Housing Administration (FHA) fees
- Veteran's Administration (VA) fees
- Rural Housing Service (RHS) fees that are related to mortgages that the government guarantees
- A land survey for verification of the boundaries of the property
- Title changes (e.g. a settlement fee, title search, title examination, closing service letter, deed preparation, notary fees, attorney's fees and title insurance)
- Courier/Delivery fees
- Recording fees
- Transfer taxes
- Home warranty
How Much Do Closing Costs Actually Cost?
You can usually expect to spend 3-5 percent of the property price on closing costs. The amount of closing fees varies according to the lender, location of the property, and price of the home. The following are some of the general guidelines provided by the Federal Reserve Board regarding some of the most common fees:
- Application Fee: $75-$300, including a credit report for each applicant
- Loan Origination Fee: 1-1.5 percent of the loan amount
- Points: 0-3 percent of the loan amount
- Appraisal Fee: $300-$700
- Home Inspection Required by Lender: $175-$350
- Prepaid Interest: Varies according to amount of the loan, interest rate, and number of days to be paid; $300-$750 is not unusual
- Private Mortgage Insurance: 1.5 percent or less of the loan amount to prepay the first year
- FHA, VA, or RHS Fees: 1.5 percent, 1.25-2.0 percent, or 1.75 percent
- Homeowners' Insurance: $300-$1,000 per year depending on the price of the home
- Flood Determination Fee: $15-$50
- Survey: $150-$400
Be Wary of "Junk Fees" Added to The Closing Costs
Most mortgages include "junk fees" or "garbage fees" and, while they cannot be avoided altogether, they may be minimized. If you are purchasing real estate you should watch out for excessive processing and documentation fees in the following areas:
- Application fee
- Underwriting fee
- Mortgage rate lock fee
- Loan processing fee
- Broker rebate
These fees are often subject to negotiation, so if any seems oddly high, ask about it. This principle applies to all fees, in fact, as just the act of questioning the fee will often result in the fee being lowered or even eliminated altogether. In any case, you should always try to negotiate fees and shop around between various lenders for the best costs. You might even be able to save some money by using another lender with significantly lower fees and paying points to lower your rate.
All-In-One Pricing of real Estate Closing Costs
There are some lenders that offer so-called "all-in-one" flat-rate fees that encompass all closing costs in order to streamline the process as much as possible for consumers. "All-in-one" is a term that can also be used when describing other mortgage products as well, so it is necessary to be cautious when shopping for such products. Be sure to buy the one that applies only to closing costs for the mortgage, not other banking relationships or products.
Keep Costs as Low as Possible
You might be able to request that the seller pay closing costs if the market in your area is a buyers' market, but don't necessarily count on it. If this is not possible, the best option might be to get an all-in-one mortgage, since this will allow you to pay the fees without feeling the punch in the gut of paying them individually.
You should look into comparison shopping, which will allow you to become comfortable with the whole process while also getting a good idea of the costs from various sources. Try requesting good faith estimates from half a dozen lenders and then compare the results. Once a lender is chosen, be sure to save their good faith estimate, which will be useful later. You can also ask your preferred lender to match the terms in a good faith estimate from another lender. It never hurts to have lenders compete for your business. In the end, the lender will likely sell your loan to another lender anyway.
Minimizing Anxiety and Expense
The HUD-1 form is the official form listing all closing costs. This form should be given to you at least 24 hours before closing. Compare it to the good faith estimate. If the figures don't match, ask questions.
Taking the time to comparison shop and thoroughly review all involved documentation enables you to minimize the worries and expenses that accompany closing costs when buying real estate.