November 10, 2020
A typical homebuyer, depending on the type of the loan and other factors, might expect to pay between 2-5% of the purchase price for closing costs. For those just learning about closing costs, that can certainly sound like a large dollar amount needed at the time of closing, but depending on the type of loan you have, you may be able to reduce your overall costs. 2-5% is just a reference point because there are so many different factors that can be involved.
What Do Closing Costs Mean?
Closing costs are the fees and costs due at closing. These costs are generally lumped into three categories — fees, title fees, and prepaid costs such as interest and insurance.
What Are Origination Fees?
Each lender may handle their fees or costs differently. Some lenders bundle everything into an origination fee, and others break things out. It's a good idea to understand what these are and that in many cases, the lender simply passes on costs they are incurring.
Here are some examples of origination fees:
- Home appraisal fee
- Courier fees
- Credit checks
- Flood certification fees — if necessary
- Underwriting fees
- Processing and administrative fees
- Mortgage points — if used
What Are Title Fees?
Not every closing has title fees, but the majority do. These fees typically cover a title search, insurance, and settlement. It might also be a good idea to maintain title insurance afterward buying a home to protect your investment — that is totally up to you.
What Are Prepaid Home Costs?
Prepaid costs might include insurance premiums, taxes, homeowners association (HOA) fees, and more. Typically, these are held in escrow and paid as they come due. You might prepay one full year of homeowner’s insurance and keep an extra two months in reserve. You might also need to pay the rest of the year’s HOA fees or other fees and taxes. Your loan estimate will further outline all of these fees.
What Are Mortgage Points?
One mortgage point is equal to 1% of the total home loan. Points are used to lower the interest rate of the loan. As an example, you may opt to pay one or two points at closing to secure an interest rate that is lower than what the going rate would be without points. For buyers with available cash for closing, this is a good tactic to reduce your monthly payment over the life of the loan.
What Are HOA Fees?
Not every neighborhood has an HOA, but HOA fees are used to keep neighborhoods or buildings — like condos — in great shape. These fees might cover landscaping, gates, or extra amenities like pools, gyms, and more.
How Can I Avoid Paying Closing Costs?
The bottom line is that you probably cannot avoid paying closing costs. However, there are some ways in which motivated sellers will pick up some of the costs. Sometimes that comes by raising the purchase price or rolling the closing costs into the loan amount. By doing something like that, you are essentially borrowing more so you have less cash outlay at closing. For the most part, closing costs cannot be folded into the loan. There are some loan types — like VA Loans — which generally have fewer closing costs and ultimately may require less money at closing.
To get a complete estimate of your closing costs, you'll receive a loan estimate within three days of applying for your loan. Even though this is only an estimate of the total costs and some things can change, this will present you with a good idea of how much your closing costs will be and how much cash you'll need to bring to closing before you get your new set of keys.
To learn more about PenFed loans or what loan is right for you:
- Call 866-386-7254
- Visit the Mortgage Center