Last week we continued our discussion on mortgages when we went over interest rates and APR. When all the posts in the series are complete, you should have an understanding of mortgage types, structure, rates, points, fees, mortgage insurance, and refinancing. This week we are going over some of the origination fees and closing costs you’ll come across.
- 1 – Common Types of Mortgages
- 2 – Mortgage Structure, What is PITI?
- 3 – Interest Rate vs APR
- 4 – Origination Fees and Closing Costs>
- 5 – Discount Points
You hear the term all the time, so what are origination fees? Origination is the multi-step process that goes into getting a mortgage set up. If you haven’t already, read Pre-Approval or Pre-Qualification, Which One do you Need? In that post I went over some of the documents you need to get a mortgage. All of those checks and research go into origination. Typically the origination fee is 1% of the loan. If you plan to refinance or sell within a few years, you can lower your origination fees by accepting a higher interest rate. But if you plan on staying in the home, remember that the higher origination fees upfront will be much lower than a higher interest paid over time.
Closing costs are simply defined as costs incurred as a result of transferring title from one party to another. When you apply for a loan, the lender is required to give you a “good faith estimate” within three days that covers these costs. They include origination fees, appraisal, title searches and insurance, recording, and points (we’ll go over this in a later post). Usually, the buyer can pay anywhere from 2-5% of the purchase price in closing costs. But those costs can be negotiated to be paid and/or split by both the buyer and seller. In some cases, closing costs can be added to the loan, in others you pay them up front. There are a lot of things that could be wrapped into closing costs. But generally speaking, closing costs can be lumped into 3 basic categories:
- Property Related Costs
- Loan Related Costs
- Taxes and Insurance Fees
Property Related Costs
Appraisal fees cover the costs of verifying the estimated value of the home justifies the amount of money being borrowed. Home inspections are often required for government-insured mortgages to make sure that the home meets standards and requirements for the buyer to live in. A title search is used to make sure that the person selling the home actually owns it and that the house doesn’t have any liens or clouds keeping it from being sold. Lender’s title insurance is often required by lenders in the case of an error when searching the title, so if someone comes along later to claim the property the lender is protected. You can also purchase an owner’s title insurance policy to protect you in the instance of title problems after you close.
Loan Related Costs
As previously mentioned, origination fees are part of your closing costs. If you used a mortgage broker, expect to pay a commission to the broker at closing. You will also typically have to prepay interest that accrues from the date of closing to the first monthly payment date. An assumption fee is added if you take over the seller’s mortgage. If you live in a state where an attorney is required at closing, expect to pay attorney fees as well. Application fees cover the costs of processing the application. These include credit checks, filing fees, and compensation if it takes more work than normal to process the application.
VA Funding Fees could be waived for qualifying veterans or spouses of deceased veterans, making it a great deal for those who qualify.
Tax and Insurance Fees
While it can vary, you usually will be required to pay two months’ of city and county taxes at closing. In a later post we will go over Private Mortgage Insurance (PMI), but if you put less than 20% down you will probably have a fee for this. If you are using FHA, VA, or USDA; expect to pay upfront funding fees to cover their costs for insuring the loan. For VA loans, you may not have to pay the fee if you are getting service-connected disability compensation, are receiving retirement but would be entitled to service-connected disability, or are a surviving spouse of a Veteran who died in service or from a service-connected disability. (Check out this page for more information.) Additionally, the typical lender will also require homeowners insurance prior to closing.
As you can see, there’s quite a bit wrapped up into your closing costs. Keep in mind that different states and counties often have their own cultures behind who pays what. For the most part, who pays which fee or cost is pretty standard. However, even if the amount can’t be changed on a fee, you can sometimes negotiate who pays the fee depending on how the market is favoring either the seller or buyer. Of course, this is where an experienced loan officer and real estate agent comes into play. Always make sure you get a break down of costs from your lender PRIOR to closing. Typically you can also get your real estate agent to get a Net Sheet from the title agency so you have a good idea of what you will be getting as a seller.