The Fine Print on Mortgage Closing Costs

The Federal Reserve Board (FRB) estimates that the average settlement cost equals 3% of the price of the home, though it could equal as much as 5% to 6% in high-tax areas. With so many factors influencing how much you’ll ultimately pay, however, it’s important to be informed about the bouquet of costs you’ll encounter. Here are several of the most common, identified and calculated by the FRB.

• Application fee: covers initial loan request processing costs and credit reports for each applicant. Generally $75 to $300.
• Appraisal fee: covers an appraisal of the property. May not be required for refinancing if you can show proof of a recent appraisal. Runs between $300 and $700.
• Flood determination fee: assessed to determine whether the property is located in a flood hazard area. If so, you will be required to purchase flood insurance as well. The cost of the flood determination assessment ranges from $15 to $50. Flood insurance runs between $350 and $2,800.
• Home inspection: verifies for the lender that the property is in suitable condition. May include termite inspection, analysis of the home’s structure, septic system and water tests, and more. Homeowner-ordered inspection may be necessary as well. Expect to pay $175 to $350.
• Homeowner’s insurance: most lenders will require this at settlement. Expect to pay $3.50 per $1,000 of the purchase price.
• Loan origination fee: covers evaluation and preparation of the loan, in addition to lenders’ attorney’s fees, document preparation costs, notary fees, etc. Generally 1% to 1.5% of loan amount.
• Points: fees paid upfront to reduce the interest rate on the mortgage. One point is equal to 1% of the loan amount, and points can sometimes be added to the total loan amount that you borrow (something else a mortgage/refinancing calculator may not take into consideration). Or, you can pay for points during closing and deduct the costs from your income taxes that year. Depending on which option you choose, points generally comprise up to 3% of the loan amount.
• Prepaid interest: covers interest on loan from the time that you settle to the time your first payment is due (about 6 to 8 weeks). The amount of interest depends on the loan amount and the length of time between settling and the first payment.
• Survey costs: lenders use surveys to confirm that structures are located where you and the seller claim they are. Runs between $150 and $400.

Miscellaneous fees and costs:

• Assumption fee if you are taking over an existing mortgage.
• Additional inspection fees.
• Escrow funds used to pay both the lender and the seller.
• Establishment and transfer of ownership fees.
• FHA, VA, or RHS fees for those who qualify for these loans.
• Finder’s fee to a broker or another third party for finding the lender.
• Private mortgage insurance: required if your down payment is less than 20% of the value of the house. Typically paid in the form of monthly premiums. Between 0.5% and 1% of the loan amount on an annual basis.
• Prorated expenses such as property taxes, homeowners’ association fees, water bills, etc. that you may have agreed to split with the seller.
• Transfer fees, recording fees, and property taxes paid to local and state governments.

Under the Real Estate Settlement Procedures Act, you are legally entitled to a “good faith estimate” of your closing costs within three business days of applying for a mortgage, whether you are using it to purchase a home or pursue a home loan refinance option. The actual amount you end up paying may vary from the good faith estimate, but at least you’ll have some idea of what costs must be settled before you make your first mortgage payment.