Let’s assume that our typical homebuyer is looking to buy a home for about $230,000, which is the average median sale price for 2011. This homebuyer is also putting a $10,000 down payment on the home, and will be financing the home with a 30-year, fixed-rate mortgage with a 5% interest rate.
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Loan Origination Fees
A loan origination fee is a one-time flat fee that a borrower must pay when the mortgage loan is closed. This is a pretty big hit to the wallet for new buyers, as it can range from 0.5 percent to 2 percent of the loan’s principal amount. This fee pays the loan originator’s administrative costs, and it is only paid to the originator if the loan goes through. It is also considered to be the originator’s commission.
On our hypothetical $220,000 mortgage, the homeowner can expect to pay up to $4,400 for this charge, although it is likely to fall within the $3,500 range. This fee should be fully disclosed on the lender’s Good Faith Estimate, which must be provided to borrowers by law.
Title Services and Title Insurance
Homebuyers are generally subject to title insurance, which the buyer must pay to protect both himself and the lender. Basically, the complicated system of title and ownership transfer in the U.S. makes this insurance necessary to provide some assurance to buyers that the owner who is attempting to sell them the home actually holds the title to that property. If there is some dispute, the title insurance will pay to defend the owner and/or the bank in a legal contest, investigate issues surrounding title disputes and provide compensation when required. On a $220,000 mortgage, this charge will amount to about $700.
Initial Tax Payments
Another thing that many homebuyers don’t realize is that they are required to make a deposit to an escrow account when the loan closes. Local lending rules that determine how these must be funded vary, but in general these are advance payments for homeowners’ insurance premiums and property taxes. An escrow agent then uses this account to pay the local tax authority and insurance company. On a $220,000 loan, this initial deposit will amount to about $400.
Prepaid interest is a daily interest charge that is paid to your lender in advance. If you close your loan before the end of a month, your lender will require that you pay interest on the number of days until the start of the first full month. Assuming this is calculated for 15 days, this would amount to about $450 on a $220,000 loan. For those who meet certain IRS requirements, mortgage interest may be deductible at tax time.
In the U.S., lenders require that homebuyers purchase homeowners’ insurance in order to protect the owner – and the bank – if the home were to be destroyed. This initial fee will be about $500 on a $220,000 loan, and the homeowner will continue to pay a monthly fee thereafter.
Appraisal, Inspection and Other Fees
There are a few other, smaller fees that homebuyers will have to bear as part of the closing process, although these can vary depending on the lender and the municipality in which the buyer lives. These include a home appraisal, flood certification, tax services, survey expenses and pest inspection. Although these are mandatory in most cases, buyers may be able to shop around for and negotiate with their service providers to help reduce these fees.
All told, the closing costs on a $220,000 mortgage will cost the homebuyer an estimated $6,500. Unfortunately, this is a major sticker shock for many new buyers. However, much like all the ups and downs in home-ownership, this expense will be much easier to handle for those who are prepared for it. Buyers who are buying a home for the first time must know that the final price for their home will be up to 2 percent more than the price they agreed to pay the seller. But, as any long-time homeowner can attest, closing fees are just the first of many expenses that come with owning a home.