Closing Costs: What You can Control
Closing costs are a necessary part of your home purchase. Transferring a property and obtaining a loan are complicated processes, and they require help from numerous different sources. Unfortunately, the people doing that work won’t do it for free.
Still, it’s wise to educate yourself on closing costs and learn how to keep charges to a minimum.
Things You Control, and Things You Don’t
Closing costs include payments to a variety of people and organizations. Some of those fees depend on the decisions you make—like which lender to work with. Other costs are beyond your control, and you’ll need to pay them regardless of where you obtain financing. For example, your county might charge fees and taxes to record your deed. Likewise, you may need to include property insurance and taxes in your closing costs, but those are required no matter where you borrow.
You need to understand all of your closing costs, but it’s best to focus your efforts on expenses that you have some control over: lender-related closing costs.
What Fees to Expect
Standard closing costs might range from 2%-4% of your home’s purchase price. But that depends on where you live, the property you’re buying, and more. Some of the most common lender-related costs include the fees below.
Application fee: This is a catch-all fee that covers administrative work required to process your application. Some lenders charge it, and others don’t. Paying one isn’t necessarily bad if all other fees are competitive.
Discount points: If you pay these optional upfront charges, you may qualify for a lower interest rate. A point is 1% of your loan value, but one point typically does not reduce your interest rate by one full percentage point. These fees may make sense if you’re going to keep your loan for the long term.
Origination fee: The origination fee compensates people for marketing, helping you with the borrowing process, and performing other duties.
Credit check: Some lenders charge a separate fee to review your credit history. Others bundle that service into an application fee or other charges.
Title fees: It’s critical to know if anybody has a legal claim to the property you’re buying. The title search attempts to discover those claims (such as liens on the property), and a title insurance policy protects your lender (not you) if any claims come up after closing. You can purchase additional coverage to protect yourself as well as the lender, which is probably wise.
Appraisal: An appraiser provides an unbiased opinion of your home’s value. Appraisals protect your lender—not you.
Other fees go by a variety of names, including underwriting fees, processing fees, and more. Ask your lender which fees they charge, and what you’re paying for. Again, you’ll also pay local governments and other organizations, depending on your loan, but those charges typically aren’t within your lender’s control. For example, if you get an FHA loan, you may have to pay an upfront mortgage insurance premium. If you buy a property with a homeowner’s association (HOA), you may have to pay separate fees.
What About “No Closing Cost” Loans?
It’s tempting to avoid paying closing costs, but you need to understand the pros and cons of paying out of pocket. Some lenders advertise mortgage loans with a variety of names.
For example, you might pay:
- No closing costs
- Flat closing costs (a flat $2,000 or so)
In reality, you pay closing costs—but you don’t see them. Instead, lenders typically package the closing costs into your loan or add them to your loan balance.
When you wrap closing costs into your mortgage, you pay more interest. That effectively raises the price you pay for your house, and that’s not necessarily good or bad—as long as you’re aware of it and you consciously choose to do so.
With no “closing cost loans,” you end up with a higher interest rate. Lenders earn their compensation over the years (or more quickly through complicated financial transactions) through that higher rate, so they may not care whether you pay up front or take a higher rate.
It might be less expensive to pay closing costs by writing a check. To understand what option is best for you, do some basic loan calculations to see how different options affect your loan balance and your lifetime interest costs. A loan amortization table shows these details, and you can use a Google Sheets template to do the math for you.
How to Minimize Closing Costs
You probably need to pay closing costs, but you don’t need to overpay. It’s easy to get the best deal possible: just shop around. Ask at least three mortgage lenders for a Loan Estimate, which is an official, legally-binding overview of the fees lenders charge to fund your mortgage. Compare those documents, and ask each lender for details on anything you don’t understand. That process should help you choose the right loan and get a fair deal.