How Much Are Closing Costs on a Mortgage?
As you plan to purchase a home, it’s important to keep in mind that you won’t just be paying the cost of the home. You will also be paying “closing costs,” which are all those fees associated with your real estate purchase. Closing costs on a mortgage may be paid by the seller but are most often paid by the buyer and are paid at closing, when you sit down at the closing to sign papers and the property title is transferred to you.
What is included in closing costs?
Closing costs on a $200,000 home can range from $5,000 to $10,000, depending on several factors. Fees cover costs incurred by your attorney, lending institution, and appraiser to cover professional and administrative services. They include:
Keep reading for a breakdown of each cost.
Property transfer tax
In Vermont the largest closing cost is usually the Vermont property transfer tax, which is paid by the buyer of the house, based on the sale price. For the first $100,000 of the sales price of an owner-occupied home, the fee is calculated at a rate of .05% ($500). For amounts over $100,000, the fee is calculated at a rate of 1.45% of the sales price.
For example, you would calculate the transfer tax on a $200,000 house like this:
Transfer tax on first $100,000 = $500
Transfer tax on second $100,000 = $1,450 ($1,000 x 1.45%)
Total transfer tax = $1,950
The calculation above is based on owner-occupied homes. For second homes or investment properties, the rate is 1.45% on the entire sale price, so closing costs are higher. In other words, the transfer tax on a $200,000 second home would be $2,900 ($950 more than the tax on an owner-occupied home).
Title search fees
The second-largest fee is usually the cost of the buyer’s attorney to do the title work, issue title insurance, and conduct the closing on the house. The lender requires basic title insurance, which protects the lender in case there is a lien against the property that the attorney did not find. The buyer may also opt to pay an additional charge for an expanded owners policy (which is not required by the lender). Attorney fees are usually a minimum of $600 to do the title search and $400 for the loan closing. Title insurance, which is issued by your attorney and is based on the loan amount, can add another $500 or more.
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Origination fees consist of optional “points,” paid by the buyer to lower the interest rate; and loan level price adjustments (LLPAs), which are based on the borrower’s credit score and the amount of the down payment amount. These fees can usually be eliminated by raising the interest rate. Your lender will present and explain these fees once he or she has your credit report scores and knows the amount of your down payment.
Escrow fees are required by some lenders and not by others. If you plan to escrow your property taxes and homeowners insurance into your loan, your lender will collect 1/12th of the annual payment for these each month. The escrow funds will be used to pay the property tax and homeowners insurance bills once they become due. Some people prefer to do it this way because it allows them to pay their taxes, insurance, principal, and interest with one check. The downside is that the borrower will need to come up with additional funds at the closing to fund the escrow. The homeowners insurance needs to be paid for the first year up front and usually a minimum of six months of property taxes must be paid.
Other smaller fees collected at the closing include town recording fees, a flood certification fee, an appraisal fee, a credit report fee, a tax service fee, underwriting fees, and rate lock fees. These fees vary quite a lot between lenders, so you will want to shop around to get an idea of what various lenders are charging.
The lender will give you a loan estimate, once you apply for the loan, which will list the fees. This is usually provided to you within three business days of application. Many online applications offer the loan estimate at the same time you submit your application.
How to reduce closing costs
To reduce some of the closing costs, the buyer and seller can agree to the seller paying some of the closing costs. On conventional mortgages, the seller is limited to 3% of the sale price on loans over 90.01% of the sale price, and 6% of the sale price for loans at 90% or under. These are also capped at what the actual closing costs are, as the seller can’t contribute more than the actual closing costs. The amount is written into the purchase and sale contract.
Some lenders may have programs where they pay some of the closing costs, but this usually comes with a higher interest rate, and is more common on mortgage refinances than purchases. There is a lot of additional information about home buying closing costs on the web, so do your research and ask your lender about closing costs before you begin the mortgage process.
About Mark Wright
With over 35 years of mortgage banking experience, Mark Wright is a mortgage originator who serves the mortgage needs of Vermont families in Northeastern and Central Vermont, including Essex, Caledonia, Orange, Orleans and Washington Counties. He enjoys helping Vermonters with their financial needs and assisting borrowers with their mortgages. Mark resides in Waterbury Center with his wife and has two grown children. He enjoys traveling, outdoor sports, and spending time with family and friends.