Finances

What are mortgage closing costs?

Close on a home loan, and you’ll pay fees to cover the lender’s paperwork, services, and other expenses. Closing costs typically include points, title insurance, property inspections, and appraisals. Keep reading to learn more.

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Mortgage closing costs explained

Closing costs. Model of house and money.
Learn what mortgage closing costs are. Source: Adobe Stock

Are you considering buying a home? If so, you probably have heard the term “mortgage closing costs” and know it’s an important aspect of home buying.

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But what exactly is it, and why should they matter to you as a homebuyer? This blog post will break down everything you need to know. Read on for all the details!

What are mortgage closing costs and what do they include?

As you know, buying or refinancing a home will involve considerable costs. For example, there are the down payment and monthly payments.

But when it comes to closing costs, most people simply don’t know what it is and what it includes. Nevertheless, knowing every detail and cost included in your mortgage is fundamental.

Simply put, mortgage closing costs are fees and expenses buyers must pay when securing a home loan. The amount goes directly to the lender and their partners.

These expenses can be 3% up to 6% of the loan amount and will be disclosed to buyers and sellers before the deal is completed. It may include:

  • Loan Origination Fees;
  • Appraisal and Survey Fees;
  • Title Insurance;
  • Homeowner Insurance;
  • Private Mortgage Insurance (PMI);
  • Mortgage Points;
  • Property Tax;
  • Closing or Escrow Fee;
  • Attorney Fees;
  • Miscellaneous Fees.

These fees might vary depending on the lender, state, and loan type. So if you want to ensure what you are paying for, remember to read your mortgage paperwork in detail.

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Who pays for mortgage closing costs?

If you’re wondering: “Do I have to pay the whole amount of closing costs?” Well, the answer is no. Both homebuyers and sellers can pay for it.

Although buyers tend to pay a higher amount, the seller must also bear some costs—for example, the real estate agent’s commissions and a real estate transfer tax.

Homebuyers can also request sellers to pay for part of it, called seller concessions. Consequently, if they agree, this can be helpful for your finances.

There are limits to the seller concessions. As a result, they can cover a certain percentage of your home loan value. Depending on the loan type, down payment, and occupancy, it can vary.

How to estimate your closing costs?

Young woman with a laptop sitting on the floor having doubts and with confuse face expression
Closing costs can add up to your expenses. Learn more about it. Source: Adobe Stock

Overall, these costs will be 3% up to 5% of the total loan amount. Practically speaking, if you take a $300,000 mortgage, you will end up paying $6,000 to $15,000.

But when it comes to the application process, the lender is required by law to provide you with a loan estimate document a few days after you submit your application.

Before closing, they’ll give you a Closing Disclosure document, which is a final summary of what is included in the closing costs.

However, if you want to be aware of it before applying, you can contact a local real estate agent to help you estimate it based on the area and eventual home price.

How to reduce your closing costs?

When buying a home, closing costs can accumulate quickly – and add to the overall stress of the process. But luckily, there are ways you can reduce it.

The first thing to do is to shop around and analyze your options. Comparing multiple lenders’ fees and expenses can help you save a lot.

As said, you can also ask the seller to help you pay for it. They might lower the purchase value or cover some of your closing costs.

Scheduling your closing near or at the end of the month can also help you cut down expenses. It will help you reduce your daily interest charges.

Another option is getting a lender credit toward it. You can opt for a low-closing-cost or no-cost mortgage. This will require a higher interest which will be used to cover some of your costs.

When do you have to pay mortgage closing costs?

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Keep reading and learn more about closing costs. Source: Adobe Stock

Closing costs are unavoidable when it comes to purchasing a property. The mortgage closing often happens between 8 to 10 weeks from the application.

In the meantime, you’ll receive the closing disclosure document, which will provide a list of the costs included so you can proceed with the payment.

Usually, you’ll pay for it during the closing meeting. At this point, the lender will accept your down payment and any amount related to closing costs.

What happens if you can’t afford to pay your closing costs?

If you can’t afford it, the best option is not to get a mortgage. Not having the necessary amount might be a sign that you’re not ready to take a home loan yet.

Even if you tried to reduce costs by asking your seller to cover some of them, you might mess up your finances. And this is the last thing you want.

Here’s the deal: before buying and refinancing a home, make sure you’ve saved enough to cover all your mortgage costs.

Now that you understand all there is to know about mortgage closing costs, it is time to start your home-buying journey.

To help you with that, we’ve prepared some tips on things you need to do before applying for a mortgage! Keep reading and learn more!

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About the author  /  Beatriz Vieira

Beatriz Vieira is a producer and copywriter who is part of the finance writer team in this portal. She has a degree in Journalism and aims to improve her bilingual writing skills. Her subjects of most significant interest are culture, finances, and self-development.

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