What are closing costs?
“Can’t I just get a home or refinance my place with no costs? I hear you. If it is free, it is for me. Although, free usually comes with more cost down the road.
Like all products or services, there are costs to get them to production or operation. The same goes for a loan product. Closing costs vary per lender and state or county. The fees within closing costs are lender and non lender fees. Lender fees can consist of fees such as... (cost amounts are rough averages and vary per lender)
Credit report $30-150
Lenders inspections $50-150 per inspection
Flood certification $15-50
Tax service $50-80
Appraisal $500-1200 (actually paid directly to appraisal company)
Discount points - a percentage of the loan amount (tied to the market and chosen rate)
Woof. That is a lot of fees. Not all lenders charge all of those at once. On most of my files there are usually only a few of those and I personally cover my clients origination and processing costs. Why? Because I can.
Examples of Non Lender fees are as follows. Again, the cost amounts are rough averages.
Attorney Fee $200-600
Pest inspection $100-200
Escrow Fee $150-500
Title Fee $150-600
Abstract Fee $50-350
There can definitely be a few more in there. On most of my files the only non lender fees are for title and escrow.
Now when you look at your Loan Estimate and see the breakdown of all your costs, you will see Loan Costs and Other Costs. The total loan costs are the lender and non lender costs. Other costs are going to consist of taxes and government fees, prepaids like prepaid interest and amounts collected for your county taxes and homeowners insurance, and initial escrow payment at closing. That is an additional “padding” on your escrow account to ensure enough is set aside to pay your taxes and insurance on time. Pretty dry stuff, but important to know.
Most people freak out when they see their total costs on the loan estimate not realizing all the “other” costs are included. Technically they are not costs to do the loan like the “loan” costs, but are factored in because they are amortized in the loan. When a loan officer goes over costs to do a loan they always talk about just the “loan costs” and then explain the “other costs” will be added to the loan amount unless funds are brought to the closing to cover them. “Other costs” are out of anyone's control. They are what they are. Loan costs can be a bit more controlled as lenders charge them because they have overhead to cover but also because they just simply can.
If you are buying a home, costs on top of your down payment are just part of the deal. Costs within a refinance are just part of the deal as well, but they need to make sense. They are basically an investment to improve your financial position on your home. If the costs negate the improvement and or savings within the time period you are going to stay in the home, then there is no reason to move forward.
Make sure you review your costs with your loan officer and ensure they all are what was quoted upfront. When you get your final closing disclosure before closing you can compare the two and see if costs changed at all.