Mortgage closing costs: What's fair to pay?

"Closing costs" are the last element of a home loan package. But don't forget about them - they can add up to be quite a bit.

This section:

  • Describes what costs you should expect to see at closing

  • Explains which ones are avoidable, and which are not

  • Helps you find a lender with fair closing costs

In the following pages we describe the elements of the mortgage package. The second section of the guide examines your credit capacity and how lenders look at the mortgage collateral.

Refer to the table of contents if you're looking for specific information.

What closing costs should you expect?

Closing a mortgage is expensive, and there's no way around it. But a lot of fees that lenders charge are simply unnecessary. Learn to distinguish the fair ones from the frivolous.

The phrase "closing costs" is really a blanket term for all the fees and taxes you are charged at the time your loan is funded and your home purchased. But some are more necessary than others.

Closing costs generally run from three and five percent of your total loan amount, which is quite a bit of money. Some fees, like insurance, are actually recurring costs you keep paying over the life of your mortgage, while others, like property appraisals, are only paid once.

Points, which are often thought of as closing costs, are not actually included in the closing costs calculation. As you read in the section on points, discount points actually help the borrower, whereas origination points are the useless extra fees that some lenders charge to pad their profits.

Unavoidable costs.

There are a lot of costs you won't be able to avoid. Probably the largest portion of these necessary closing costs goes to the government. Property taxes, state and local mortgage taxes and recording fees are all standard government charges, and run into the thousands.

Other unavoidable fees go to necessary third parties and towards insurance. These include any escrow fees, charges for property appraisal, title search, and possibly flood or fire inspection. Also expect to pay title insurance, which protects you from fraud by the seller.

(If you don't know what any of these costs are, you can get up to speed on each and every one of them in the closing costs section of our guide to the basics.)

Possibly avoidable costs.

The big one here is private mortgage insurance (PMI), which can be avoided by making a large enough down payment.

It's hard to avoid any other cost unless you get a special cash-saving mortgage With this home loan, the lender covers most or all of the closing costs in return for a higher interest rate. It's not a bad option if you don't have much cash on hand but want or need to buy soon (especially if you expect to be doing well financially in the near future).

You can also avoid Paying PMI (even with no down payment) by accepting a higher interest rate. Eloan offers cash-saving and no-PMI mortgages with LTV's of up to 107%. Learn more here.

Avoidable costs.

It can be difficult to differentiate between truly unavoidable standard closing costs and "garbage fees" that lenders or brokers tack on for extra profit. These can appear under a variety of names including fees for loan origination, administration, payment processing, document preparation, or funding and review, to name a few.

But with all the different names lenders use to hide these fees, the best way to spot garbage fees is to simply know which fees are not garbage. So question any fees we didn't list above in unavoidable costs.

Or save yourself the trouble, by applying with Eloan, who never charge any lender fees or origination points on their loans.

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