Closing Costs Q&A

Refinancing

When it’s time to refinance, don’t let the confusion in fees drive you away. We’re here to clarify your questions.

With mortgage rates still relatively low and the regional housing market bouncing back, we’re getting more than our average number of questions related to closing costs (sometimes called settlement costs), the most common of which is, “What will closing costs run me?” We’ll take care of that one right off the bat: the rule of thumb answer is, “Between 2% and 6% of the loan amount.”

But that’s just the tip of the iceberg when it comes to consumers’ questions about closings. If you’re anticipating buying a home soon or think you’d benefit from refinancing your current mortgage, take a look at what others are asking to get a better idea of how much you’ll be spending – and where you may be able to reduce or avoid costs.

Q: What are closing costs?

A: Closing costs are fees charged by lenders and third parties related to the purchase of your home. The fees pay for the multiple services and transactions needed to execute your loan and purchase. Collectively they’re called “closing” costs because they’re typically paid at the time you finalize all the paperwork for the purchase.

Q: Are closing costs negotiable, or are they “set in stone”?

A: Some of the many mortgage closing costs are negotiable, to some extent. Not only are some fees negotiable, but who pays those costs is negotiable, too. Typically, in a purchase transaction, the buyer and seller each have their “assigned” costs, but if a seller is motivated, he or she may agree to pay some of the buyers’ closing costs. The opposite is true, too: in a seller’s market, the seller can often demand that some of the fees he or she ordinarily would pay be assumed by the buyer.

Q: Does my credit rating affect how much I pay in closing costs?

A: Yes, it can. Homeowner’s insurance, private mortgage insurance (PMI), and points can cost you more if your credit rating is low. Your credit rating is also taken into account when lenders evaluate your application and can result in a higher interest rate. The technical term is Risked Based Pricing and they will take into consideration all approval factors in the application: debt-to-income, loan-to-value, purpose and credit score.

Q: What are all the costs involved in a closing?

A: There are a number of fees, many outlined here:

Application fee: A fee from your lender or broker that covers initial costs of processing a loan request and checking your credit. Average cost: $365.

Loan origination fee: A charge from your lender for evaluating and preparing the loan. This may include document preparation costs, notary fees and other related costs. Average cost: $2,734 with a 5% down payment, or $2,537 with a 10% down payment.

Discount Fee: The discount fee is basically Points. Points are a one-time fee that can be negotiated with the lender, usually to reduce the interest rate you pay over the life of the loan. One point equals 1% of the loan amount. In some cases, especially in loan refinancing, points can be “rolled into” the amount you borrow. If, instead, you pay the points at closing, they’re deductible on your income taxes in the year they are paid (different deduction rules apply when you refinance or purchase a second home). Average cost: Between 0% and 3% of the loan.

Appraisal fee and lender-required home inspection fee: The appraisal fee covers the cost for the lender to ensure that your home is worth at least the amount of the loan; an inspection fee covers the cost of a professional to identify any condition issues like water damage, foundation cracks, etc. Average cost of appraisal: $292. Average cost of inspection: between $300 and $500.

There are a number of other fees required when buying a home or refinancing. Those include:

Prepaid interest: Though your first payment isn’t due until 6 to 8 weeks after closing, your interest payments begin immediately, and this fee covers the interest owed until that first payment

Private mortgage insurance (PMI): Applies if your down payment is less than 20% of the value of the home; this covers the lender in case you do not make a loan payment. PMI payments stop when you acquire 22% equity in your home (based on original appraised value) if your mortgage payments are current

Homeowner’s insurance: Your lender will require you to be covered by a policy that protects against physical damage

There are several additional fees you should be aware of. The Federal Reserve Board offers a comprehensive “Settlement Costs Worksheet” to prepare you for all the costs associated with your purchase or refinance and includes estimated fees.

Q: How do I know exactly what my fees will be?
A:  Your mortgage lender is required by law to provide you with a “good faith estimate,” or GFE, of all expected closing costs within 3 business days of your closing, whether you’re buying a home or refinancing. The GFE should list what costs may change prior to closing, as well as the maximum amount by which they are allowed to change, usually 10%.

Q: I’ve heard of “no closing cost mortgages.” Are those available and, if so, a good choice?

A: A no closing costs mortgage may save you thousands of dollars in upfront costs, but there’s a distinct and often painful tradeoff: You will have a higher interest rate for the life of the loan. This type of mortgage is not commonly offered but may make sense if you do not plan on staying in your home more than 5 years.

FNB Fox Valley recommends that everyone considering the purchase of a new home or a refinance of their existing mortgage think first about the costs of closing. These costs are often overlooked in the excitement of buying or refinancing, but are significant enough to require planning and budgeting. Need some help determining if a home purchase or refinance makes sense for you? Talk to one of our mortgage experts by calling your nearest branch.

This information has been prepared to help you make the important decisions involved in buying and financing your home. However it should not be viewed as a replacement for professional advice. Talk with attorneys, mortgage lenders, real estate agents, and other advisers for information about lending practices, mortgage instruments, and your own interests before you commit to a specific loan.