How Much Are Closing Costs
The process of purchasing or refinancing a home always comes with closings costs. So how much are closing costs? Well, it can be difficult to find an average closing cost since they vary depending on the type of loan, the lender, and even your area. Understanding these costs is often overwhelming, but the more you know, the more you can save. Not all closing costs are set in stone and understanding what each cost means and what it’s for can help you negotiate with lenders and shop for lower fees. Find out about the different costs and what they mean.
Types of Closing Costs
There are essentially eight mortgage closing costs, or fees, that can be charged to the borrower during the purchase or refinance process.
1. Origination fee: This fee is charged by the lender and is used to cover simple administration or processing costs. The amount of this fee is limited to one percent of the loan amount. It can be charged as a flat fee or itemized into several other fees, such as fees for application, settlement, document preparation, tax service, and others. However, the total cost of these fees cannot exceed the one percent limit. Not all lenders will charge for origination. Feel free to ask each lender about their origination fee as you shop around.
2. Discount points: A borrower can pay discount points to the lender in order to lower the interest rate, which is often known as a buy-down. One discount point is equal to one percent, and the most that the VA allows to be paid is two points. This cost is not required and can be avoided by going with a slightly higher interest rate. Most lenders will even give you a credit for selecting a higher rate. Sometimes paying discount points for a lower rate is more beneficial, but not always. Talk to your lender about these options.
3. VA funding fee: This is set by the VA and varies depending on the type of loan, down payment amount, whether you were active duty or in the reserves, and whether this is the first time you have used your VA home loan benefits or not. Be prepared to answer questions about your service so your lender can estimate closing costs associated with the VA funding fee.
4. Appraisal Fee: This is typically between $400 and $500 and is required on purchase loans, cash-out refinances, and refinancing from a conventional or FHA loan to a VA loan. It usually needs to be paid at the time the appraisal is completed. The lender typically orders the appraisal, but some lenders will allow you to order your own, which may save you some money. A streamline refinance, or IRRRL, does not require an appraisal.
5. Credit report fee: To verify your creditworthiness, lenders pull your credit through the three credit bureaus. Lenders will often ask for this fee at the time of application, but not always. The typical credit report fee is between $30 and $50, so rest assured that this fee doesn’t do much to raise typical closing costs.
6. Title insurance: Lenders require title insurance in order to protect them and the borrower from any liens, judgments, or legal discrepancies tied to the home that may not have been discovered in the original title search. Lenders will typically use a title company they work with regularly, but you have the right to pick your own. This gives you the chance to shop for the best price possible.
7. Hazard insurance and property taxes: The lender will collect advanced payments for hazard insurance and property taxes to be deposited into an escrow account to ensure that both can be paid when they come due.
8. Recording fee: This fee is for documentation of the new deed of trust to county record. It is usually pretty small, ranging from $30 to $70.
How Much Are Closing Costs and How Are They Paid?
VA loan closing costs can be paid out-of-pocket at closing. However, they can also be financed into the VA loan in most cases. When purchasing a home, closing costs for sellers can vary since the VA allows the seller to pay for all or some of the closing costs, though this isn’t required. You will need to work with your realtor to negotiate with the seller. And finally, remember that you can get a credit from the lender to cover some or all of these costs by selecting a higher interest rate.
Low VA Rates takes pride in not only offering great rates, but also educating veterans about the VA loan process. If you still have questions, feel free to contact us. We can find out more information about the fees in your state and even estimate closing costs for you. Call us today to see what is available for you.
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