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Depending on the amount of your loan, your closing costs could be much higher.
Typically, closing costs run between 3% and 5% of your loan amount, so if you’re borrowing $100,000 you can expect closing costs of $3,000 to $5,000. If you’re borrowing $200,000 you can expect closing costs of $6,000 to $10,000. Source
As Martin points out in the above video, some closing costs are necessary and unable to be negotiated.
- Homeowners insurance – pays for replacement or repairs should the home become damaged or is destroyed. It also pays for belongings in the home that were also destroyed. A bank will not hold a mortgage on a home that is not insured.
- Title insurance – protects the bank and homeowner against any possible liens against the property. Title insurance is different from homeowners insurance as it focuses on possible problems with the title, while homeowners insurance covers defects in the home.
- Appraisal fee – covers the work of a home appraiser who determines the value of your home. This is always done with a new purchase and sometimes done with a refinance.
Closing Fees That Can Be Negotiated
Other closing fees are set individually by the lender and are, therefore, open to negotiation.
- Attorneys fees – These are paid to the mortgagor (not your personal attorney). Attorneys fees cover the costs associated with examining the title and other legal requirements of the bank.
- Loan processing fee – This is a fee that some banks and, more commonly, brokers charge. Described as a “A fee charged by the lender for accepting a new loan application and gathering all the necessary documentation”, you can argue your way out of this miscellaneous fee.
- Points – These are charged by many lenders as a way to manipulate the interest rate. If you have good credit, you can refuse to pay points, but you should also shop around to find a lender who will not charge points.
- Application fees – Many loan brokers will charge non refundable application fees just to start the process of your loan. Asking for such a fee should signal that the broker is not someone you want to work with unless, you have questionable credit and will need their expertise to get a loan.
- Document preparation fees – These are charged when the bank uses an outside company to prepare the loan closing documents.
- Notary fee – This is paid to the individual who notarizes the loan documents. If this person is part of the bank staff, there is no reason you should have to pay it.
This is not to say that a bank should not charge you any of these closing costs. It’s just that they should not load down your application with too many of these fees.
For example, if they charge an application fee and a loan processing fee, then a document preparation fee and notary fee should be included, not tacked on.
Closing Costs That Are Optional
There are also some fees that you should consider paying that the bank may not require.
- Home inspection fee – A home inspection is absolutely necessary when you’re purchasing a new house in order to make sure the home is structurally sound and that there is no hidden damage that will cost you a lot of money down the line.
- Mortgage life insurance (not to be confused with homeowners insurance) – This will pay off the loan should one or both mortgage holders die or become disabled. This way other family members don’t have to worry about the mortgage should something happen to a breadwinner.
More About Closing Costs & Home Refinancing
I have been a certified tightwad striving for financial freedom since I became pregnant with my first child — and I decided to find a way to stay home with him full-time. I enjoy sharing my personal experiences in my journey back to financial health and planning for a future — which will include sending 2 kids to college and early retirement.