Mortgage closing costs 101: what you need to know before you buy

By Lisa Rinkus | Citizens Staff

Purchasing a home can be one of life’s most exciting events, but nothing takes the fun out of it more than unexpected costs. Even though you’ve put everything you’ve got into buying a new place, set more money aside. Because no matter what you buy, or where you buy it, the transfer and sale of property isn’t free.

The fees associated with this transfer are called closing costs. If you have an astute real estate agent and loan officer, they’ll prepare you for these expenses well before you finalize the paperwork. But if you’re new to the process and want to know what to expect before even peeking at any open houses, here’s what you need to know.

Lenders have a fixed amount of time — usually within three days of receiving your completed mortgage application — to provide you with a loan estimate. This document outlines what the lender plans to offer you if you’re approved. In addition to information about your closing costs, the estimate lists your approximate monthly mortgage payment and interest rate, as well as any stipulations, like prepayment penalties (if there are any). If you’re still in the process of saving for a down payment, now’s a good time to estimate how much you might need to have for the closing costs (they are typically 2-6% of the amount you plan to borrow).

Standard buyer closing costs can generally be divided into two categories: lender fees and homeowner costs.  Fees associated with the lender include legal, application, processing, underwriting and title fees. Homeowners may be expected to pay for other items including appraisals, homeowner’s insurance, property taxes and title fees.

A real estate commission, the largest fee for the transaction (up to 6% of the total cost of the property) is considered a closing cost, but that is paid by the buyer (that’s good news!).

Once you make an offer on a home that is accepted by the seller and you’ve been approved for your loan, your lender will send you a closing disclosure. The closing costs are listed on Page 1 of the document and explained on the following page.

At this point, most of us just want to grab that house key and head to our new place, so we’re tempted to breeze through the paperwork. But it is critical to read your mortgage closing documents thoroughly, checking costs for accuracy and possibly any duplications. Take the time to understand every item, and if you’re unsure of anything, ask your lender for clarification. (Some homebuyers bring their own lawyer to the closing for this purpose.)

Most homebuyers won’t know the exact settlement costs until the day of the sale, so bring your checkbook. Also, you’ll need a photo ID for your signature to be valid.

In some cases, a lender may offer credits that offset closing costs in return for getting a higher interest rate. This may seem enticing, but you’ll be paying more money over the life of your loan. In some cases, this might make sense. For example, if you’re starting a higher paying new job in a few months, but don’t have the cash to spare in the near term, or you’re expecting a windfall (wouldn’t that be nice?).

Regardless of whether you pay for your new home in cash, or you finance it with a mortgage (as most of us mere mortals do), there will always be closing costs. The most cost-effective way to pay these fees is up front and out of pocket, so you’re not paying additional interest.

A related note: You may have heard the term “no-closing-costs mortgage” tossed around. If it sounds too good to be true, it probably is. The term itself is misleading because closing costs are standard in any real estate transaction process. These “no-closing-cost” mortgage fees are just rolled into the loan, which means you’d be paying interest on them. Your situation and future plans will determine whether this option makes sense.