Home LoansLoans

Closing Costs and Fees Explained

By April 17, 2020 June 23rd, 2020 No Comments

 

Closing Costs and Fees Explained by American Federal Credit UnionWhen you prepare to shop for your first home, you know you have to save money for the down payment. However, you should also be putting funds aside for your closing costs. These fees cover the cost of legal services, taxes, title search, insurance for a clear title, homeowner’s insurance, lender costs, and other miscellaneous fees. Most homebuyers should expect closing costs totaling up to 5% of the home’s purchase price. For example, if you plan to buy a $250,000 home, it’s recommended to save up around $12,500 for closing costs.

Types of Closing Costs

Investopedia1 reports that the average U.S. buyer pays about $4,876 in closing costs for a home loan. After you qualify for a mortgage, your lender will provide a Good Faith Estimate that details the closing costs. The majority of closing costs fall into three categories:

  • Title fees, which comprise about 70% of closing costs for the average mortgage loan. These costs include title insurance, which protects the lender’s investment if a lien, tax or ownership claims against your property. You must also pay for the title search, which ensures a clear title on the home before closing. The title fee also includes the fee you will pay the title company for managing the settlement of the property.
  • Lender fees, which include the cost of underwriting your home loan, transfer taxes, credit checks, processing, and administrative fees, application fee, appraisal services, courier services and flood certification where necessary. The mortgage company may bundle these into one origination fee or itemize them on your financial disclosure. Buyers who decide on a loan backed by the Federal Housing Administration must prepay a mortgage premium of 1.75% of the loan amount. For the above home, that fee would be $4,375. You may also want to pay discount points to the lender at closing. With this type of fee, you pay 1% of the loan amount to lower your interest rate by a quarter-point or half-point. With the example above, the cost of one mortgage point would be $2,500 added to your closing costs.
  • Prepaid costs for your home’s insurance and property tax costs. Most lenders require an escrow account that holds two months’ of homeowner’s insurance premiums and a full year of homeowner’s insurance costs.

Ways To Reduce Closing Costs

Fees for settlement on home loans can vary dramatically from one title company to another, so it’s important to shop around if you want to save money on closing costs. You can also compare costs on homeowner’s insurance, home inspection services, and pest inspection services. Other costs, such as property taxes, are not negotiable.

If you are short on the upfront cash to pay closing costs, you can negotiate with the buyer for a credit at closing. Returning to the example above with the $250,000 home, you would raise your offer price by $12,500 to $262,500 and receive a check for $12,500 at settlement to cover the closing costs.

Some mortgage programs also allow buyers to roll closing costs into the total mortgage amount. These loans may carry a slightly higher interest rate than charged for traditional home loans. Buyers can also seek grants or loan programs to cover closing costs from state, federal and nonprofit agencies.

Ask your lender if you can schedule a closing for the end of the month. This will allow you to save money on prepaid interest charges, potentially significantly reducing your closing costs.

If you’re looking for a Utah mortgage lender, consider the trustworthy team at American United Federal Credit Union. To learn more about our home loans, including programs for veterans, first-time home buyers, construction loans, lot loans, and low-down-payment options, get in touch today

 

Sources:

1 Understanding Mortgage Closing Costs

 

 

+