This week we are talking about closing costs on purchases and how to understand them. Questions we’ll be covering include: What are closing costs? What are the typical average closing costs when it comes to a home purchase? How much are they?

We’re going to answer these questions in the context of a real sample deal that we’ve been working on. If you want to follow along with a visual aid, we suggest watching the video above.

Closing Costs are about the work that goes into closing the loan.

I think a lot of people will think that closing costs are a percentage. They’ll say something like, “Yeah, closing costs are 1% of the sales price.” Now that is a very classic, back of napkin technique, but the problem is, closing costs are not really a percentage. They’re the cost to do a loan.

Do closing costs vary a lot?

There’s not much of an extra cost to do a $200,000 loan than a $500,000 loan. The same amount of work is generally going into it. The difference for closing costs between a $200,000 loan and a $500,000 loan might only be about $800.

What’s an average closing cost?

If someone asks us as, say, we’re headed to a meeting, what the closing costs are on a loan, we’ll typically throw out $3500. Closing costs are usually going to be between $3000 and $3800. To put this into perspective, the refinance closing costs we had in our last podcast costs were about $2,500. Be sure to check that episode out as well.

What makes up the numbers that go into the closing costs?

You can follow along in the video to see us going through this live, but the loan estimate scenario we are going to be looking at is for a sales price of $370,000 with 20% down.

The total closing costs in this scenario are actually $3,563. Now, if you’re looking at the loan estimate, at the bottom, you’ll see this big number of $4,963. This extra $1,400 of other costs aren’t closing costs, rather they’re prepaid taxes and insurance, also known as the impound or escrow account. They’re a cash-to-close item. You have closing costs and then you have cash-to-close. They’ re not the same thing.

Let’s break down the $3,563 in closing costs.

The first one that shows up is the underwriting fee. This one here is $999. Underwriting fees are part of every loan. And if they’re not included in the loan as a closing cost, they’re being buried into your interest rate. It’s very standard to have an underwriting fee of about a thousand dollars.

Then there’s the appraisal fee. In this example, it’s $535, and in most cases, it is going to be between $500 and $550. This is a very straightforward fee, and it’s actually the only fee that typically you are prepaying. There are no other fees that you’re paying upfront. But, in this case, the appraiser wants to get paid before going out. It should be noted, though, that VA appraisals are usually a tiny bit more, closer to $600. Now, for the average appraisal, there are what we call appraisal waivers. If you put enough money down and you have good enough credit, they’ll sometimes give you a waiver, which is really nice. That being said, you might not want to exercise your right to get that waiver. You may want to know what that home is appraising for.

Next up is the credit report fee. In the example we’re working with, the fee here is $48. Generally speaking, these fees are going to be between $40 and $60 nowadays. Unfortunately, getting your credit in this context is not free. The credit bureaus (Equifax, Experian, and TransUnion) have been raising the rates every year. Now, we don’t make a dime off these credit reports and we wish they were free, but, unfortunately, there is a small fee for these.

The flood certification fee in this example is $11. In other cases, they might be $15 to $20. The purpose of this fee is to certify that you either do or don’t have flood insurance. If we didn’t have that fee you’d be forced to have the insurance. The banks need to verify whether or not it’s needed. The fee is to cover the work that goes into figuring out whether it’s needed or not.

Then there’s the tax certification fee. This is to guarantee that your taxes are paid for every home. This fee covers the work the bank needs to do is verify that the tax information on your home is accurately documented and whether it’s been paid or not. They also note down everything regarding your taxes. Here the fees are around $25 for the tax certification fee and an additional $64 for other tax-related services fees. These are very typical for what you’re going to see.

You’re also going to see something called a CPL. This stands for closing protection letter. The CPL is something that all banks have asked title companies to provide. It’s basically a hold harmless waiver. Now, it’s important for people to know that we don’t control who the title company is. That means we don’t control these fees. These are just simple estimates. If ever you were to call us (602-535-2171) and ask what the fees were they would come straight from the title company.

On the estimate, you’ll also see doc prep fees, endorsement fees, a lender’s policy fee and either an escrow fee or settlement fee. These are going to be things you’re going to see in this section. And they are really all going to add up to, in cases such as this one, about $1800 to $1,900. The escrow or settlement fee is the cost to do the labor. It’s paying the title company to do the work. There’s a lot of work that the title company does. This fee goes to whoever is performing all the due diligence they need in order to prepare the work, to prep the docs and to get everything figured out for your property.

And that really sums up closing costs.

What’s the deal with prepaids and other fees?

Now let’s just touch for a second on the prepaids and the impound account. There’s also a cash to close component for insurance and taxes. In the example we’re working with there’s a $60 recording fee. This is basically the County Recorder’s fee to record your documents.

The other prepaids are homeowners and mortgage insurance and property taxes. These last three go into an escrow account. You can think of the escrow account as kind of like putting gas in your car. You’re paying it actually through the lender for your own benefit. You’re basically putting into your home so that the lender can use it and pull it out as you live in your home. They’re going to be pulling money from your mortgage payment every month into this account so that when your insurance is due once a year and your taxes are due twice a year, that there’s always a hundred percent of what’s needed in the account at that time. But it’s important to note that they are not costs, but are cash consideration.

Wrapping things up

Now, there are lots of things to talk about on a loan estimate but the most important thing that we want to communicate is how to read these closing costs and make sure you’re aware of the distinction between the closing costs and prepaid items. We hope that helps everyone.

If you have any questions about this or if you have any questions you’d like us to answer on our podcast, you can email your questions to team@azmortgagebrothers.com or give us a call at (602) 535-2171. Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

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Thanks for listening and reading the Mortgage Brothers Show. Let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@AZMortgageBrothers.com or Eddie@AZMortgageBrothers.com.

Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.

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