What Are Mortgage Closing Costs?

When it comes to mortgages, down payments and interest rates aren’t the only things you need to prepare to pay for. Mortgages also come with fees known as closing costs, which need to be paid by the borrower at the closing, when the mortgage is finalized.

Wondering what exactly are mortgage closing costs? We’ll break it down for you.

The Components of Mortgage Closing Costs

Mortgage closing costs are composed of the various fees and charges that borrowers will need to pay during the final stages of a home purchase or refinancing. These costs typically include loan origination fees, appraisal fees, title insurance, attorney fees, prepaid property taxes, homeowners insurance premiums, and mortgage insurance premiums, among others. Let’s take a look:

Loan Origination Fees 

This is the fee charged by the lender for processing and underwriting the mortgage loan. It typically represents a percentage of the loan amount and covers the administrative costs associated with evaluating and approving the loan application.

Appraisal Fees

Lenders require an appraisal to determine the value of the property being financed. The appraisal fee covers the cost of hiring a licensed appraiser to determine the value of the property and provide an unbiased valuation.

Title Insurance

Title insurance protects the lender and the borrower against any loss that may arise due to unforeseen defects or issues related to the property’s ownership or title. There are two types of title insurance: lender’s title insurance, which protects the lender, and owner’s title insurance, which protects the buyer. Both types of insurance require a one-time premium payment that is paid at the time of closing.

Attorney Fees

In many states, it is common to have an attorney involved in the closing process. The attorney’s fees cover their services for reviewing the legal documents, conducting the title search, and facilitating the closing.

Prepaid Property Taxes

Lenders often require borrowers to prepay a portion of the property taxes at closing. This ensures that there are sufficient funds in an escrow account to cover future tax payments.

Homeowners Insurance

Lenders typically require borrowers to have homeowners insurance to protect the property. The premium for the first year of insurance is often paid at or before closing by the borrower.

Mortgage Insurance

If your down payment is less than 20% of the home’s purchase price, lenders may require private mortgage insurance (PMI) or mortgage insurance premiums (MIP) for government-backed loans. This insurance protects the lender in case of default and is usually paid monthly, but a portion may be due at closing.  Typically, PMI payments continue until the borrower has reached a certain amount of equity in the property.  MIP payments continue for the life of the loan.

What Factors Affect Mortgage Closing Costs?

Closing costs depend on several factors that can influence the amount you’ll pay during a mortgage transaction. Factors such as the loan amount, the value of the property you’re purchasing and where it’s located, the program you might be using for the mortgage, as well as your interest rate can all affect closing costs. 

Here are some of the factors that play a significant role in determining the overall mortgage closing costs and how they affect the costs.

Loan Amount

Lenders may charge fees based on a percentage of the loan amount to cover various administrative, processing, and underwriting expenses. These fees may include loan origination fees, application fees, and other lender-specific charges. Since these fees are calculated as a percentage, a higher loan amount will result in higher costs.

For example, if the closing costs for a mortgage are estimated to be 2% of the loan amount and the loan amount is $200,000, the closing costs would be $4,000. However, if the loan amount increases to $300,000 while maintaining the same percentage, the closing costs would increase to $6,000.

Property Value

The property value can impact closing costs during a mortgage transaction in several ways.  Appraisal fees, which are necessary to determine the property’s value, depend on multiple factors such as property size and location. So, a higher-valued property may  result in higher appraisal fees. 

Additionally, certain closing costs, such as title insurance premiums, are based on the amount of coverage provided. 

Finally, property taxes can also affect closing costs as lenders often require borrowers to prepay a portion of property taxes at closing. Since property tax amounts are typically tied to the property’s assessed value—you guessed it—a higher property value will result in higher prepaid property tax amounts included in the closing costs.

Location

Closing costs can vary based on state and local regulations, which may impose additional fees or taxes. Some areas have transfer taxes or recording fees that are specific to the location and can increase overall closing costs. 

Also, certain states may have different requirements or regulations regarding the services involved in the closing process, such as title searches or attorney fees, which can vary the costs. 

Loan Program

The chosen loan program can influence the closing costs incurred during a mortgage transaction. Different loan programs, such as conventional loans, Federal Housing Authority (FHA) loans, Veterans Affairs (VA) loans, or United States Department of Agriculture (USDA) loans, have their own specific requirements and associated fees. 

For instance, FHA loans typically have upfront mortgage insurance premiums and ongoing mortgage insurance payments, which can increase the closing costs. VA loans may require a VA funding fee, while USDA loans may involve guarantee fees. 

Interest Rate

The interest rate on a mortgage can indirectly impact closing costs. While the interest rate itself does not directly determine the closing costs, it can affect the amount of money a borrower needs to be able to close on a desired property. 

A higher interest rate can result in a lower loan amount, as the corresponding monthly mortgage payments would be higher. With a lower loan amount, the portion of closing costs calculated as a percentage of the loan amount would be reduced. 

Conversely, lower interest rates can lead to higher loan amounts, potentially increasing the closing costs. That being said, the impact of interest rates on closing costs is relatively minimal compared to other factors, such as loan amount and property value.

Putting It All Together

When it comes to getting ready for the mortgage closing, it’s important for borrowers to carefully review the Loan Estimate provided by the lender, as it provides important details about your mortgage loan. You can request Loan Estimates from different lenders so you can choose and compare the loan that is right for you.

Review these various factors and understand their impact on closing costs. By doing so, you’ll be able to plan your finances accordingly and potentially explore options for reducing or managing these expenses effectively.

Norway Savings Bank MortgageGO

At Norway Savings Bank, we understand every homeowner has unique needs and circumstances.  With Norway Savings Bank MortgageGO, you can find a mortgage that’s just right for you. Not only will you get competitive rates, you’ll get a supportive dedicated local mortgage professional that will help you every step of the way and technology that makes applying on the go easy. So let us help you find the right mortgage for you!  Check out MortgageGO or contact a mortgage loan officer.