After saving for a down payment, finding the perfect home, and getting approved for a mortgage, closing costs can catch some home buyers by surprise. Mortgage closing costs typically run from 2% to 5% of the loan cost, including property taxes, mortgage insurance, and more. In this article, we will explain closing costs, what the major players do, and understanding the loan estimate.
Closing costs can be grouped into two categories, lender fees and non-lender fees. Lender fees are the fees the lender charges to cover the overhead incurred during the process of originating, processing and approving a home loan application. Non-lender fees include funds needed for settlement services, title insurance and attorney fees.
Your loan officer will provide you with an initial Loan Estimate during pre-approval. The fees will clearly be listed as ones the lender collects and ones that third parties charge for services needed to close your loan. Lenders can also collect funds to pay for a credit report as well as an appraisal. A lender will also ask for an origination fee. An origination fee is what a lender charges in order to set up the loan.
Closing costs are one-time charges you will see at the closing table and “recurring” fees referred to as prepaid or finance charges. A one-time fee is a charge for a property appraisal, and you’ll never pay for an appraisal again for the same transaction. A recurring fee is one you will pay again and again. Homeowner’s insurance is a recurring charge, for example.
Prepaid interest is collected at closing. Prepaid interest is based upon the number of days until the first of the following month. This is your first mortgage payment and will be made at closing. If your closing is scheduled for the 20th of the month, the lender will collect 10 days of interest up to the first of the following month. You will not make a mortgage payment on the first of the next month because the lender already collected it. For someone who closes on the last day of the month, the lender will only collect one day’s worth of interest.
At the closing table, you will also prepay your first year of homeowners insurance. And if you have escrow or impound accounts, accounts set up to make monthly payments toward your annual property tax bill and insurance premium, lenders may ask that you pay one or two months of escrow payments in advance in case taxes are higher than anticipated for the following year.
Can you negotiate closing costs? Not really, no. Lenders cannot give one borrower a discount on a lender fee and not give that same discount to someone else. Further, lenders have no control over fees third party servicers require. There are some services where you do have more control and can select these services on your own. When you get your loan estimate there will be a list of “Services You Can Shop For.”
Your documents will highlight who is responsible for paying what. There will be seller fees and buyer fees. Most of the fees will be yours. So, who pays for them? You. That is, unless you negotiated with the sellers to pay part or all of your closing costs as listed on the sales contract.
You can also have the lender pay the closing costs, again some or all. How does the lender pay for your closing costs if lenders are required to offer the same costs to all borrowers for the same type of loan? Lenders can adjust the interest rate on your loan and provide a lender credit at the closing table. Here is how it works:
When you get interest rate quotes from your lender, you’ll get a rate without any discount points and you can get a rate quote with discount points. A discount point is expressed as a percentage of the loan amount and reduces the interest rate on the loan. A discount point is a form of prepaid interest, the lender gets some interest upfront when you pay a point or the lender gets the interest over the life of the loan. It is your choice whether or not to pay points. Using a regular 30-year loan, by paying one point, or 1.00% of the loan amount, the rate on the loan will drop by about 0.25%. The more points you pay, the lower your rate will be. However, work with your loan officer to see if points make financial sense in your situation.
Okay, now what if instead of lowering your rate by 0.25% your increase your rate by 0.25%? Why would anyone do that? In this instance, the lender will provide you with a credit in exchange for the higher rate. This is how “no closing cost” loans actually work. The lender will agree to pay for some or all of your costs by adjusting your rate. If on a $250,000 loan, paying $2,500 for a point will lower the rate by about 0.25%.
Increasing your rate by 0.25% will allow a lender to provide a credit to you in the amount of $2,500. Again, work with your loan officer to find the ideal situation but many times exchanging a slightly higher rate for a lender credit works out better, especially if someone is relatively short term.
At Your Closing
You will receive your Closing Disclosure three days before your scheduled closing. Use this form to compare the initial loan estimate you received from your lender. Lender fees must be the same. If lender fees are higher on the closing disclosure than the original estimate the lender is responsible paying the overcharge.
For third party charges by providers the lender selected, the lender is responsible for amounts greater than 10% of the original quote. For servicers picked out by the borrowers, the borrower is responsible for the additional fees. At closing you will review and sign your documents and wire the necessary funds to the settlement agent.
Use our Florida Mortgage Closing Cost Calculator to estimate your monthly mortgage payment, including taxes, insurance, and PMI.