Understanding Mortgage Closing Costs: Who Pays & What's Included

Buying or selling a home requires patience, persistence, and a whole lot of preparation. Before buying a new home, consider these factors to decide if you're ready.

What Are Closing Costs

This references the fees and expenses needed for all the activities related to buying a house, including processing the paperwork to buy a house and transfer ownership. Generally, these costs range somewhere around 2-6% of the home's purchase price, depending on your state and other factors. The buyer or the seller can pay closing costs, but that is up for negotiation between the buyer and seller. Closing costs apply whether you buy or refinance a house.

What is Included in Closing Costs

• Loan origination fees: Charged by the lender for processing your application, typically shown as a percentage of the loan amount
• Title insurance: Protects both the buyer and the lender against potential property disputes and ensures that the property title is clear of any liens or claims
• Appraisal fees: Covers the cost of a professional appraisal to decide the property's market value
• Home inspection fees: Pays for a thorough property inspection to identify potential issues
• Escrow fees: Handles the transfer of funds and documents between all involved in the transaction
• Property taxes and homeowner's insurance: As the buyer, you may need to prepay property taxes and homeowner's insurance premiums at closing
• Recording fees: Pays for updating public land records with new property ownership information
• Discount points: This is an optional fee that you can pay to lower your interest rate. Generally, one discount point equals 1% of the loan amount—Usually, it reduces the interest rate by a quarter of a percentage point (0.25%)
• If applicable, attorney fees: In some cases, legal representation may be needed, which includes legal fees

Paying for Closing Costs

Once you know your budget to buy a house (if you haven't done that yet, check out our mortgage calculator), do the math to find out what your closing costs might be, which is your house budget multiplied by 0.06 for 6% closing costs. You can change the number to any percentage, but we recommend going with the higher number so you're prepared if closing costs are more than expected.

Once you have that figure, you know if you need to have that amount in cash or if you can look for homes at a slightly lower price point to make sure you have enough to pay for them out of pocket. Sometimes, the lender can fold closing costs into the mortgage, but not all do that. Or, if you negotiate with them, the seller can pay for some or all of the closing costs, known as a seller concession. That happens if the home is challenging to sell or if there is a high number of houses available for sale.

How to Get Closing Costs Waived

While it isn't possible to skip closing costs altogether, you can explore closing cost assistance or down payment assistance options to pay less out of pocket. A good place to start looking for those options is your county website, your real estate agent, or even your local bank. Many financial institutions have assistance programs to help you pay less when buying a home, so do your research!

Who Pays Closing Costs, Seller or Buyer

Your real estate agent will help you negotiate, but you can ask the seller to pay closing costs. Sellers generally will contribute toward closing costs or pay for all of them if there are a lot of homes for sale in the area if the home has been on the market for a while, or if the house is difficult to sell for some reason. Otherwise, you as the buyer will be paying for closing costs.

Choosing Your Mortgage Lender

You can ask for a loan estimate from any lenders you're considering to finance your new home. The Consumer Financial Protection Bureau recommends getting loan estimates from at least three lenders, all of which should outline your closing costs and the terms of the loan. Schedule time to review these costs with each potential lender, and before committing, consider the following points:

• Know you can repay the loan and afford the monthly payment
• Feel confident that you did your homework and shopped around for the best loan
• Understand whether your payment could increase in the future (your payment may change due to changes in escrow, which pays for your homeowner's insurance and property taxes)
• Know whether the loan you are getting has fees or amounts later on that you may not be able to afford, like a balloon payment (a large one-time payment you will have to make at the end of the loan term) or prepayment penalties (fees for paying off your home loan early)

Pros and Cons of Closing Costs Included in the Loan

Your lender may or may not allow you to roll your closing costs into your loan. This depends on a few different factors, including the type of home loan you chose, the loan-to-value ratio (how much your loan to buy the house is compared to the house's market value), and your debt-to-income (DTI) ratio (your debt payments compared to your income), among other things. If you can roll your closing costs into your loan, below are a few factors to consider.

Pros

• Pay less money upfront to buy your home; you'll still need to pay closing costs for things like homeowner's insurance, though
• Keep more money in your account for emergencies or projects to improve your new home
• You could afford to buy a home sooner than later if you don't have a large down payment saved

Cons

• Pay interest on your closing costs, along with the rest of your mortgage, costing more over time than paying upfront
• Your closing costs will increase your loan amount and payment, affecting your DTI and might mean you no longer qualify for your mortgage
• Increases loan-to-value ratio, which might mean you have to pay private mortgage insurance (PMI). Ask your lender to help you do the math to see if you could avoid PMI if you paid closing costs
• Lowers the amount of equity you have in your home. Equity is current market value of your home minus what you owe

Understand the Loan Estimate and Closing Disclosure

You'll receive your loan estimate within three business days of submitting your application. It outlines the lender's fees and costs for getting a mortgage. Generally, the loan estimate and closing disclosure will have similar figures but can change if the loan program or amount of your down payment is changed, the appraisal comes in higher or lower than expected, you took out a new loan or missed a payment which has affected your credit and how you qualify for the mortgage, or your lender couldn't document your overtime, bonus, or other income.

At least three days before you close on your home, you'll receive a closing disclosure, which includes all of the loan details, estimated payments, closing costs, and other fees or costs to get your mortgage. Compare that disclosure with the loan estimate you received from your lender to ensure the numbers are similar. You can find lots of good information from the Consumer Financial Protection Bureau's home loan toolkit, with details on closing disclosures and loan estimates starting around page 20.

WaFd Bank is Here to Help

With over 107 years of experience, we know a thing or two about buying homes. We've got the experience and tools to make sure you stay informed along the way, like our mortgage calculator, which can help you figure out what your monthly payment could be, and a secure portal to send documents and check for status updates. Visit your local branch to find out how WaFd Bank can help you get your dream home, give us a call at 800-324-9375, or learn more about WaFd Bank's mortgage options.

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