In every transaction I get the question, “what are my closing costs?” First, it’s important to note, every transaction, be it a purchase or refinance, has closing costs. There are no loans without closing costs because there are many parties that work on your loan in order to provide the necessary requirements to close it. It’s a mortgage professional’s responsibility to disclose these costs to you, although many of the costs are from third parties. With that foundation, I’d like to share what I believe are the three most important facts about closing costs.
Three Important Facts About Closing Costs
- Closing costs and pre-paids are often lumped together, but there is a fundamental difference. Closing costs are services you pay for in conjunction with your loan, and pre-paid items are items you must pay at close that you would have paid regardless, such as property taxes, homeowner’s insurance, and pre-paid interest for your mortgage.
- On a purchase, closing costs and pre-paids can be paid by you, paid by your rate, or paid by the seller. Because you do not yet have equity, there is no option to roll closing costs into the loan. On a refinance, it is possible to roll closing costs into your loan, and even come to close with nothing out of pocket, provided you have the equity to do so.
- Some closing costs can change, some cannot. Lender fees and third party fees you cannot shop for, such as appraisal or credit report, cannot change. Other third party fees, such as title and escrow, can change within a 10% tolerance. Pre-paids are completely variable because they are based on the time you close. For example, if taxes are due the month after you close, those will be collected at closing, but if they were just paid, less taxes will be collected at closing.
Total closing costs and pre-paid items will vary from loan to loan based on a variety of factors. The important thing is you have a mortgage professional you can trust who disclose accurately from the beginning, review your costs and pre-paid items with you in detail, and be forthright and transparent when anything changes. My clients can always expect this of me. See below for more, and if you have questions about closing costs, don’t hesitate to contact me!