If you’re thinking about buying a home, you’ll need money for a down payment and closing costs. Unfortunately, many borrowers confuse the two, assuming closing costs are the same as a down payment.

They aren’t and knowing how much you’ll need to close your loan ahead of time can help avoid delays in your closing.

Understanding Closing Costs

Closing costs are fees a lender and third parties charge for processing and underwriting your loan. Typically, closing costs are 3 to 5 percent of your loan amount, but they vary by lender and situation.

Some closing costs cover costs lenders incur, such as handling the paperwork. Other costs cover third-party services, such as the appraisal and title search

What are the Most Common Closing Costs?

Closing costs vary by lender, but in general, here are some of the fees lenders charge.

Underwriting or Processing

Underwriting and processing fees cover lenders’ costs for determining if you qualify for a loan. 

Credit Report Fees

Credit reporting fees cover the lender’s cost to pull your credit reports from all three credit bureaus. 

Origination Fee

Some lenders charge an origination fee as a blanket cost for all lender fees. Origination fees are charged in points. One point equals 1% of your loan amount.

Discount Points

Discount points are optional but can lower your interest rate. If the rate a lender quotes you is higher than you hoped, you can buy it down by paying points up front. Like the origination fee, one discount point equals 1% of your loan amount.

Appraisal Fee

All lenders require an appraisal done by a licensed appraiser. This fee covers the cost of the appraiser visiting the property, pulling comparable sales, and writing the appraisal report for underwriting.

Title Fees

All lenders require a title search. This ensures the home is free of any liens besides the owner’s mortgage. The title fees cover the title search cost and the required title insurance to protect the lender.

Borrowers also have the option to purchase owner’s title insurance for an additional fee, but it’s not required.

Closing Fee

The closing fee covers the cost of preparing your documents, having the closing, and funding your loan.

Can you Get Help with Closing Costs?

If you don’t have enough money for the down payment and closing costs, you may be able to get help from your lender or the seller.

Lenders sometimes offer incentives to cover the closing costs in exchange for a higher interest rate. This increases your payment but decreases your total cash to close. 

Some sellers help with closing costs too. Again, this is something you can negotiate before you sign the purchase contract if you need the seller’s help.

Final Thoughts

Keep closing costs in mind as you create a budget to buy a home. Your closing costs are in addition to the down payment, so make sure to choose a down payment you can afford while leaving money to cover the costs to close your loan.

If you have any additional questions about closing costs give us a call today at 480-666-9287 or head over and request a quote!