MORTGAGE MATTERS

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Jun 2016

Mortgage Closing Costs: 5 Types You Need To Know

Your Loan Estimate from your lender will show these things called settlement costs (a.k.a. closing costs.) What are they and why do you have to pay them? Here’s a breakdown for you.

What are closings costs?

Closing costs are things that have to be paid in order to close on your home, like property taxes, homeowners insurance, title search fees, appraisal fees, etc.

Services completed and costs involved in the loan process need to get paid. All of those fees and expenses are lumped together under the umbrella of closing costs.

Now, although they are called closing costs, you may be asked to pay for them as the action happens – such as the home inspection or the appraisal. You may be able to negotiate as part of your sales contract that the seller of the property cover some or all of your closing costs (depending on the type of loan you are doing), but it doesn’t hurt to be prepared for them and understand them. In general, you can expect to see between 2-6% of your purchase price in closing costs. Because each state has different requirements, some items mentioned below may not apply to your specific situation. Things like transfer taxes, mortgage insurance, and title insurance are not flat-rate type costs. Be sure to ask your loan officer for more information on these items.

What kinds of closing costs will you see?

There are five main types of fees and costs that you will see.

1. Title fees (or attorney fees)

These are the fees that relate to making sure that the seller of the property can transfer the title (deed) of the property to you without also giving you any liens or issues also attached to the property. It also protects the lender from issues too. These fees include the title search fee and title insurance fees. Title fees also include the cost to record and register your ownership at the courthouse after closing, as well as the use of a notary that witnesses your official signatures on your closing documents. If you are using an attorney or settlement company to help you with your closing, you’ll be asked to pay them for their involvement, too.

2. Pre-paids and escrow (property taxes and homeowner's insurance)

Property tax pro-rations and homeowner’s insurance premiums will be included in your closing costs to make sure there are no gaps in coverage between when the seller stops paying and you start. Because you are paying them before your regular mortgage payment kicks in, they are often called “pre-paids.” This may also include pre-paid interest to cover the gap between when you close and when you make your first mortgage payment. If you plan on including your property taxes and homeowner’s insurance in your monthly mortgage payment (also called your escrow account), allowing your lender to pay these bills on your behalf in the future, you will need to make an initial deposit of funds for any bills that need to be paid soon after closing.

3. Mortgage insurance

If your loan type requires some type of funding or guarantee fee (most common with government-insured loans), you may have to pay the total amount upfront. Loans with a small down payment involve substantially more risk for the lender so mortgage insurance provides the lender protection in case you go into foreclosure. Although these upfront fees are usually rolled into the total amount you are borrowing, it will still be itemized separately on your Closing Disclosure when you’re at closing.

4. Loan-related fees (lender fees)

These fees include any origination charges, application fee, processing fee, credit report fee, and any discount points you want to pay for to get a lower interest rate. Some lenders also include underwriting fees, wire transfer fees, termite inspection fees, and your appraisal in this category.

5. Property-related fees (may also be found in lender fees)

During the loan process, your property will be appraised to determine its value. It may also be inspected for pests and for any other structural, electrical, or plumbing issues. The cost of these items may show up as closing costs if you haven’t already paid for them prior to closing. You may also see a survey fee if there is a need to confirm property lines. Both the lender and FEMA requires properties be evaluated for the need for flood insurance and there’s a fee for that as well. You may also see these items listed as lender fees or loan fees. Occasionally, you may also see miscellaneous closing costs that do not fit into these specific categories, such as a home warranty fee, courier fees, or wire fees. Everything is itemized though, and feel free to ask your loan officer to explain anything if you’re not sure what it is. Contact one of our mortgage bankers if you’d like to talk about your closing costs or if you need additional information.

Frequently Asked Questions

Chances are, if you're wondering about it, someone else has too. Here are answers to some of the questions we hear most often.

What are mortgage closing costs?
Mortgage closing costs are fees and expenses that must be paid to finalize a home purchase or refinance. They cover services completed during the loan process, including title work, appraisals, inspections, and lender fees. In general, homebuyers can expect closing costs to total between 2% and 6% of the purchase price (though the exact amount varies by loan type, location, and lender). Your Loan Estimate will itemize all expected closing costs early in the loan process.
What are the five types of mortgage closing costs?
The five main types of mortgage closing costs are title fees, pre-paids and escrow, mortgage insurance, loan-related fees, and property-related fees. Title fees cover the title search, title insurance, recording fees, and notary or attorney costs. Pre-paids and escrow include property tax pro-rations, homeowners insurance premiums, and prepaid interest. Mortgage insurance fees apply to certain loan types that require an upfront funding or guarantee fee. Loan-related fees include origination charges, processing fees, credit report fees, and any discount points. Property-related fees cover the appraisal, pest inspection, structural inspection, survey, and flood zone determination.
How much are closing costs on a home?
In general, homebuyers can expect closing costs to total somewhere between 2% and 6% of the purchase price of the home. The exact amount varies based on the loan type, the state where the property is located, the lender, and the specific services required. Some costs are flat fees, while others, such as transfer taxes, mortgage insurance, and title insurance, are calculated as a percentage of the loan amount or purchase price. Because each state has different requirements, some costs may or may not apply depending on where you’re purchasing.
Can the seller pay my closing costs?
In some cases, yes. You may be able to negotiate as part of your sales contract for the seller to cover some or all of your closing costs. This is sometimes referred to as seller concessions. Whether the seller can contribute and how much they can contribute depends on the loan type and the terms of the purchase agreement. Your Atlantic Bay Mortgage Banker can help you understand what’s possible for your specific loan and situation.
What are pre-paids and escrow at closing?
Pre-paids are costs paid at closing that cover expenses due before your regular mortgage payment begins. They typically include property tax pro-rations, homeowners insurance premiums, and prepaid interest for the period between your closing date and your first mortgage payment. If you set up an escrow account so that your lender pays your property taxes and homeowners insurance on your behalf, you will also be required to make an initial deposit at closing to fund the account for any bills due soon after closing.
What are title fees at closing?
Title fees are closing costs related to verifying and transferring legal ownership of the property. They include the title search fee, which covers a review of public records to confirm the seller has clear ownership, and title insurance, which protects the buyer and lender from financial loss if a title defect is discovered after closing. Title fees also include the cost to record the deed at the courthouse, notary fees for witnessing signatures, and any charges from a settlement agent or closing attorney.
What are closing costs in Virginia, North Carolina, Florida, and Georgia?
Closing costs vary because each state has different requirements for transfer taxes, recording fees, attorney involvement, and other closing-related expenses. In Virginia and North Carolina, a licensed real estate attorney is typically required to be involved in the closing process, which affects the structure and cost of title and settlement fees. In Florida and Georgia, closing costs may include specific state and county taxes that vary by location. In general, homebuyers across these states can expect closing costs to fall within the 2% to 6% range, though the specific breakdown will differ. Your Atlantic Bay Mortgage Banker can walk you through what to plan for in your market.
When do I find out how much my closing costs will be?
Your lender is required to provide a Loan Estimate within three business days of receiving your mortgage application. The Loan Estimate itemizes your expected closing costs so you can review them early in the process. Before closing, you’ll also receive a Closing Disclosure, which provides the final, confirmed figures for all closing costs. If you have questions about any line item on either document, your Atlantic Bay Mortgage Banker can explain what each cost covers and whether it’s negotiable.

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The views and statements expressed are deemed reliable as of the publish date indicated and may not be accurate or reliable at any future date. The views and statements provided are those of the author. Discussions regarding any financial information provided are not intended as individual recommendations and do not reflect the views or advice of Atlantic Bay Mortgage Group, L.L.C. The views expressed are subject to change at any time in response to changing circumstances in the market. *For refinances, the total finance charges may be higher over the life of the loan. Atlantic Bay Mortgage Group, L.L.C. disclaims any obligation to publicly update or revise any views expressed or information given. Loan programs may change at any time with or without notice. Information deemed reliable but not guaranteed. All loans subject to income verification, credit approval and property appraisal. Not a commitment to lend. Atlantic Bay Mortgage Group, L.L.C. NMLS #72043 (nmlsconsumeraccess.org) is an Equal Housing Lender. Located at 600 Lynnhaven Parkway Suite 100 Virginia Beach, VA 23452.