Fees, closing costs, and out-of-pocket expenses for home loans

The fees charged to obtain a home loan are standard for each loan, and include title and escrow services, appraisals, and lender fees.

The amount that each borrower will actually end up paying out of pocket, however, is variable.

“It’s a loaded question,” said Jason Grote, broker and co-owner of Central Coast Lending. “There is definitely a cost to doing a home loan, but it can be paid for in more than one way.”

In this article, we break down the closing costs associated with each home loan, and explain the variables that go into paying for the loan.

 

Bank Fees (+/- $1,000)

The miscellaneous bank fees come from processing, underwriting, and administrative services.

Keep in mind that these fees are paid to the bank (lender) and not the broker (loan officer) who is facilitating the transaction. The fees go directly to the lender’s cost of creating and closing each loan file.

The bank fees are generally consistent across the industry. Expect to pay around $1,000 for this category, ranging between $700 and $1,500.

 

Title and Escrow Fees (+/- $1,500)

On a typical transaction, borrowers must pay to have the title report and escrow services performed. Miscellaneous charges include the wire fee, the courier fee, and the recording fee.

The Washington State Department of Financial Institutions (DFI) put together a useful guide to the title and escrow process. (Please note that some of the Washington State laws may differ from those in California, but the overview of title and escrow services works across the board.)

The DFI succinctly explains the purpose of the title and escrow process, including the fees paid:

“Title insurance and escrow process are designed to make sure when you close on your purchase, you are the legal owner, and no one has liens, claims, easements or restrictions on the property – other than the mortgage you agree to pay.

Regarding escrow:

“It also ensures all funds are properly transferred and the seller pays any outstanding expenses.”

Here is an overview of the escrow process in California.

 

Appraisal fee (+/- $500)

Lenders use the appraisal evaluation to find the current market value of the house, and in doing so verify that the home loan is for the appropriate amount.

The typical fee for appraisal services is about $500.

 

Total:

Borrowers should expect to pay about $3,000 to close a home loan.

 

Paying for closing costs

“The second part of this equation is the cost or credit associated with the interest rate,” said Grote

Borrowers pay an interest rate on the total balance of the home loan (known as the principal), and different interest rates have different “costs” associated with them.

Picture mortgage pricing on a sliding scale. Borrowers pay to obtain the best product (lowest rate) and are reimbursed with a “credit” to obtain less favorable terms (higher rates).

The “credit” can be applied to cover closing costs (as laid out above).

[To better understand mortgage pricing Click here.]

The dollar amount that each borrower must pay for each rate is expressed as a percentage of the total principle of the loan. For example, a 4.5% interest rate on a 30-year fixed loan might cost 1 point (1%) of a $300,000 loan. In this case, the borrower would pay $3,000 for the 4.5% interest rate.

For a 5.0% interest rate, however, a borrower might be given a “credit” for 1% of the loan amount. This $3,000 can be put towards covering the $3,000 accrued in closing costs.

In some situations, borrowers are also able to pay for their closing costs with a “gift” from a family member. Click here for our guide on gift giving.

Each and every situation is unique.

“There is no one size fits all,” said Grote. “We have to custom tailor this process to every client.”

“When we custom fit a loan, we will help our clients understand the logic that goes into the decisions so that they can participate in the process,” said Grote.