We've taken a look at all the closing costs you must pay when you buy a home with all cash. The main goal of that post was to not leave cash buyers broadsided by unanticipated costs when making an aggressive offer. Let's look at the mortgage closing costs when buying a property.
Given most real estate buyers need a mortgage to purchase, it is even more relevant to go through all the closing costs when debt is involved.
Let's go through an example and highlight each closing cost as well as the main difference in closing costs between a cash purchase and a purchase with a mortgage.
Mortgage Closing Costs When Buying Property
Below is an example of a $1.7 million mortgage preapproval amount. The target purchase price is $2.8 million. Therefore, the borrower is putting down $1.1 million, or 40%.
The closing fees paid by the borrower are under the Borrower column. The Lender column could be the fee it pays or a credit to the borrower. We'll discuss the ambiguity below.
Mortgage Closing Costs Analysis
Total Origination Charges ($679.57): An origination fee is an upfront fee charged by a lender for processing a new loan application. It's compensation for putting the loan in place. An origination fee is often quoted as a percentage of the total loan.
Notice how the Lender has an origination charge of $1,548.43. The Lender origination charge could really be $1,548.43 or it could be a made-up number it highlights to make it seem like the Lender is subsidizing the majority of the total origination charge. As a borrower, you don't really know for sure.
A savvy Lender will position the entire Lender column as a credit to the borrower to entice the borrower to do business with them. In other words, the Lender can tell the borrower that it is covering $1,548.43 of the $2,228 origination fee ($1,548.43 Lender fee + $679.57 Borrower fee). Or, a Lender can say if the borrower takes out a mortgage with them, the Lender will pay a total of $2,125 in buyer closing costs.
The reality is, a bank can charge whatever origination fee it wants. The higher the subjective origination fee it charges, the higher the credit they can give to the borrower to make it seem like the borrower is getting a great deal. The origination fee is something you should be able to negotiate with your lender.
Credit Report: $15.43. A good lender will usually credit you this cost upon closing. However, the credit report fee exists because the spreadsheet is only an estimate provided during a preapproval process.
Title – Closing Escrow Fee: $3,723.43. An escrow fee, or closing fee, is paid to the title company, escrow company, or attorney for conducting the closing of a real estate transaction. Typically, the title or escrow company oversees the closing as an independent party.
The seller usually picks the title company because the seller initially pays a fee to analyze the title of the property before selling. For the buyer to insist on another title company would be a waste of money since analyzing the initial title costs ~$500, and the title was already analyzed.
The closing escrow fee is something that can be negotiated with the seller. You can ask the seller to pay part of this fee or all of it.
Title – Lender's Policy: $3,657. This fee is the main difference between paying all cash and buying a home with a mortgage. If you have no lender, then a lender has no lien on your property. The lender wants to protect its investment in you.
A Lender's Policy, or Loan Policy, only protects the lender's interests in the property should a problem with the title arise. It does not protect the buyer. Therefore, you may be able to negotiate down the Lender's Policy cost with the lender.
Recording Fees: $127. This is an unavoidable expense charged by your city to record the new homeowner. The fee varies city by city.
Title – Owner Policy (optional): $4,571.50. Although owner's title insurance is optional, it is highly recommended all buyers get owner's title insurance to protect their purchase from any title defects, such as liens on the property or wrong names. The older the property, the more potential defects to the title.
In this example, if you are going to buy a $2.8 million dollar property, you better get an Owner Policy. The Title Owner Policy lasts for the life of ownership.
Title Notary: $50. This fee is not included in the spreadsheet, but it is a common fee a buyer has to pay when signing official closing documents. If you want the notary to come to your house, then the fee will likely go up.
No Inspection Fee: Some of you may be wondering where the inspection fee is. The inspection fee is optional and not a fee that is normally associated with a lender. Perhaps a lender might require a borrower to perform a inspection and put in an inspection contingency to be approved, but I haven't heard of such a situation.
No Real Estate Attorney Fee: In California, a real estate attorney is not necessary. However, a real estate attorney is necessary in many states. The cost usually ranges from $150 – $350/hour. However, a real estate attorney fee has nothing to do with the cost owned to the seller, lender, and escrow company.
Cost Of Prepaid Interest And Reserves/Escrow
All the expenses in this section are non-negotiable since they are expenses a buyer would have to pay sooner or later. These costs are the costs of owning a property with a mortgage.
$98.87. This is mortgage interest that accrues between the time of closing and when you pay the first mortgage. In this example, interest accrues at $98.97 a day for 10 days.
Notice how the interest rate is only 2.125% for a 7/1 ARM. That's the lowest I've ever seen for an amortizing super jumbo loan. With a 2.125% mortgage rate, the monthly principal & interest payment on a $1.7 million loan is only $6,390.33.
The rate is lower than normal due to relationship pricing, where the borrower has a better relationship due to having a certain amount of assets with the lender already.
Either way, everyone should be taking advantage of record-low rates. Record-low interest rates is one of the main reasons why housing will likely hold up during a recession.
Real Estate Tax Escrow:
Some cities and title companies will make you pay your real estate taxes upfront. In this case, the amount is $0.
Some cities and title companies will make you pay part of your homeowners insurance during the transaction. In this case, the amount is $0.
1st Year Insurance Premium: $2,649.60.
Some cities and title companies will make you pay for an entire year's worth of homeowners insurance. Your lender will force you to get homeowners insurance to protect their investment in you. In this example, the homeowners insurance premium looks to be about $1,200 too high.
Real Estate Taxes Due At Closing:
Some cities and states will make you pay for a pro-rated amount of real estate taxes at closing. In this case, the amount is $0. In this example, the lender estimates a monthly real estate tax bill of $2,916.67, or $35,000 a year. This comes out to 1.25% of the $2.8 million purchase price of a home.
Total Mortgage Closing Cost To The Buyer
When buying property, it's always good to have a cash buffer after making a down payment and paying all the closing fees. My general rule of thumb is to put down at least 20% to avoid paying private mortgage insurance (PMI) and have a 10% cash buffer remaining.
Therefore, in this example, the buyer should have about $280,000 in cash or highly liquid securities remaining after purchase. The last thing you want to feel after buying a property with leverage is to feel stressed out. If you lose your job or your investments start declining in value after purchase, having a nice cash stash will help hold you over until a recovery.
The buyer in this example would be mistaken if he thought he only needed a $1.1 million downpayment to buy a $2.8 million home with a $1.7 million mortgage. He needs to come up with $1,115,522.50 due to $12,773.93 in actual closing fees and $2,748.57 in prepaid interest and reserves.
In general, the lender will tend to have conservative mortgage closing cost estimates. As a result a buyer usually ends up getting a refund after closing. This way, the lender insures that it makes 100% of its money instead of having to chase a buyer down.
Related: How To Invest Your Down Payment If You Plan To Buy A House
Mortgage Closing Costs Overview
Below is a summary of the mortgage closing costs for your review. Due to mortgage closing costs, you may want to consider paying 100% cash for a home if you can. Paying all cash will help you save money.
- Appraisal fee ($300-$400)
- Home inspection ($300-$500)
- Application fee (varies)
- Assumption fee (varies)
- Attorney’s fee (hourly)
- Prepaid interest (based on loan amount)
- Origination fee (about 0.5% of loan amount)
- Discount points (1 point costs 1% of the loan amount)
- Mortgage broker fee (0.50% to 2.75%)
- Mortgage insurance application fee (varies)
- Upfront mortgage insurance (0.55% to 2.25%)
- FHA, VA and USDA fees (1% to 3.3%)
- Property taxes (two months’ worth)
- Upfront HOA fee (varies)
- Homeowners insurance (depends on home value and location)
- Title search fee (about $200)
- Lender’s title insurance (varies)
- Owner’s title insurance (0.5% to 1% of purchase price)
Always Calculate Your Mortgage Closing Costs Before Buying
Before you make an offer to buy a property, always bake in your estimated closing costs. This way, you will properly calculate the true purchase price so you can plan your funds and your offer strategy accordingly.
As a homeowner, one of your main goals is to find a way to minimize fees, minimize ongoing maintenance costs, lower your mortgage rate, and reduce your property taxes. The more you can lower your costs, the higher your cash flow.
It is sometimes a good idea to aggressively negotiate with a seller on closing costs. However, too much negotiation on the nitty-gritty might turn a seller off. Instead, it's better to just negotiate hard on the final price.
All the mortgage closing costs to buy a property are a good reminder to try and keep your property for as long as possible. When it comes time to sell a property, the fees are even higher due to the 4-5% selling commission and transfer taxes! A savvy buyer will also know the approximate selling fees as well in order to make a more informed offer.
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I was able to get a new 7/1 ARM jumbo loan for 2.125% with no fees to buy my new house. The 15-year fixed and 30-year fixed rates look especially enticing today.
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15 thoughts on “Mortgage Closing Costs When Buying A Property”
Do you think taking a 3/1 arm is too much of an adventure? I’m planning to stay for 7-10 years if purchase now, but the difference between 3/1 and 10/1 arm is 0.5%!
In another word, do you think this historically low interest rate will last for 3 years?
What is the exact rate? And what is the rate for a 5/1 and a 7/1? I generally like to match the fixed duration with the duration of stay or duration of owning the mortgage.
I got a 7/1 ARM myself with the plans to pay off the mortgage within 7 years.
A 3/1 ARM has to have a very low interest rate though, so let me know. I don’t think rates are going up for the rest of the decade.
What I’m quoted for jumbo loan of about 1.1mn, 30 yrs:
5/1 or 5/5, 2.625
I do plan to pay off in 10 years, but could also refinance into 15yr before the 3/1 arm fluctuate.
Is it worth the risk?
Hard to say without knowing your finances. I would split the middle and go with a 5/1 ARM at 2.625%.
Good idea! Good luck with your negotiation! Will start from my side next week too~! But seems that buyers are still quite stubborn.
sorry, I meant sellers are still quite stubborn now.
My vacation property is in New Jersey in the midst of the Covid-19 pandemic. I thought would find the following interesting from my title company regarding going to closing.
“I am all good on my end. The title is clear.
At this time, we are only permitting one party at a time into our building for closing. When you arrive in our parking lot, please call the office at 609-xxx-xxxx. We will then let you know whether or not it’s ok to come into our building. We will then walk you directly into our sanitized closing room where you will sign your documents. We do require that you wear a mask when entering our office, the staff will also have masks. If you are not comfortable with coming into our building, you may sign in your vehicle.”
This is a great post, with great detail on what to expect.
I am curious to know if you could put a lower down payment down if this is considered your 2nd home, and still avoid the PMI? I have been discussing the purchasing possibilities with lenders to find the best financial situation for my business partner and I.
Thanks for the information
I suggest contacting several title companies to get an estimate of the closing costs. Many people just go with the title company recommended by the lender or real estate agent.
While many of the costs are state-mandated there are a lot of miscellaneous fees that can add up.
I just shopped title companies via email for my refinance in New Jersey.
I was able to save over $200 just in miscellaneous fees from the highest estimate to the lowest estimate. Not a lot in the realm of things but $200 bucks is still $200 bucks!
I disagree to force the seller to change title companies. This would cause huge friction and a waste of time. The seller has already paid a title company money to open title.
Focus on negotiating the final sale price instead.
But if you have the time, it’s a huge buyers market, and $200 makes a big difference to you, then why not. I would rather try and negotiate the final sales price down $2,000, $20,000, or $200,000 down instead.
I agree, you have to look at it as a cost of time exercise too. Is searching down a new title company worth the savings? You are expending time that could be utilized elsewhere. Additionally, you are adding in a new variable for the process. The lender/real estate agent typically uses the same title company because they have a good process in play. Sure there is nothing overly complicated about the forms, but having a “team” that works together on many efforts usually makes the process go faster. Why hold things up further introducing new players for a small gain. I agree with FS – just negotiate the sale price down further. I think its one of the reasons to go with the home inspection contingency because it allows you to super charge your counter offer. That’s where you make the deal, not on the paperwork.
I once took another $45k off the asking price after an inspection, and the seller accepted. In reality the fixes weren’t critical and could have been delayed for years. However, when someone opens the door to a negotiation, you are foolish to not ask for something. They were in a situation where they wanted to sell to get on with life. I wasn’t worrying about an additional $200 title fee.
Similarly in the case of a refinance, why delay the process further. Its likely you are getting a better rate for lower interest and monthly payment etc. Why make the process take any longer than it should. Just use the path of least resistance and go with the known players. The sooner you close, the faster you will realize the gain.
In my area, the title company is not involved in the art of the deal. They are strictly just an independent 3rd party that handles the transfer of title from one party to the other and issues a title insurance policy.
I am also just refinancing, so I am just trying to lower my own out of pocket expenses on the refinance.
Thanks for laying this out in so much detail that’s easy to understand. It’s crazy how many different fees are involved when buying a property. Even though you’d expect lenders to get this stuff right all the time, there can always be errors. I had a lender totally botch some calculations when refinancing once. It’s helpful to understand what the various fees are so you can recognize red flag errors quickly and try to negotiate some when possible.
I hope someone is paying for an inspection on a $2.8 million property you are putting $1.1 million into upfront. Even if you do find a lender who will give you $1.7 million without requiring an appraisal or an inspection for their own protection.
Thanks for bringing up the inspection fee.
The inspection fee is optional and not a fee that is normally associated with a lender. It’s at the buyer’s discretion. Perhaps a lender might require a borrower to perform a inspection and put in an inspection contingency to be approved, but I haven’t heard of such a situation.