Comparing Closing Costs

Closing costs vary based on the lender or broker, mortgage program, down payment, and interest rate.  Closing costs typically consist of four different components:  discount points, lender fees, third party fees, and prepaid items.

Discount Points

Discount points refer to the price paid for the interest rate you've chosen.  Banks and mortgage companies have a range of interest rates available every day at different prices.  The lower the interest rate, the higher the cost.  This is referred to as "paying points."  One point equals 1% of your loan amount. 

These discount points are included in the total closing costs you pay for your home loan.  You may choose to pay points (or not) based on the cash you have available, market conditions, the length of time you plan to keep your mortgage, and the specific characteristics of your mortgage.

Beware!  Some lenders may quote low interest rates with a high cost!  In the advertisement below, a 5.75% interest rate sounds great, right?

But read the fine print and you'll find that interest rate costs 3.0% in discount points.  That's $21,786 on a $726,200 loan. 

Total Cost for Discount Points:  $0 to $20,000 or more.

Lender Fees

These are charges that are paid directly to your mortgage lender or broker.  They may be called an origination, lender, application, underwriting, or processing fee.  No matter what these fees are named, their purpose is the same.  That money goes directly to the lender or broker to cover their costs for getting you a home loan.

Expect to Pay:  $500 to $2,000

Third Party Fees

The bulk of your closing costs will consist of third party expenses.  These will be paid to outside vendors for things like appraisals, title and escrow services, flood certifications, and credit reports.  Even the county where you're purchasing will get money for recording the deed at the courthouse.

Many of these fees are fixed prices that do not vary from one transaction to the next.  For instance, a credit report should cost the same whether you're getting an $300,000 FHA loan or a $1,500,000 jumbo loan.

Two fees that are not fixed are title and escrow charges.  Escrow charges are based on the purchase price.  Title fees are based on your loan amount.

In comparing closing costs between different lenders, the estimates for third party fees can largely be ignored.  These costs should be comparable regardless of the lender.  The escrow company doesn't charge Bank of America one price and Wells Fargo a completely different price.  Even though different loan officers' estimates may be slightly different, at the end of the transaction these charges are established by the respective third parties - regardless of the lender you've chosen.

Typical Charges:  $3,500 to $5,000 depending on loan amount and purchase price

Prepaid Items

Like the name suggests, prepaid items are charges that are paid in advance.  They include interest on the loan from the day you close through the end of the month, mortgage insurance (if applicable), your first year's homeowner's insurance premium, and funds required to establish an impound account for paying homeowner's insurance and property taxes. 

Just like third party charges, prepaid items should not vary from lender to lender (even though initial estimates may be slightly different).  For instance, your charges for homeowner's insurance are determined by the agent, company, and policy you choose - not your lender.

Total Cost:  Varies wildly depending on the loan amount and the value of the home.  Estimate 15 months of homeowner's insurance payments and four to six months of property tax payments.

The Bottom Line

Closing costs can be a significant - especially for larger homes with big property tax bills.  Irrespective of discount points, expect to pay $7,000 to $8,000 for a smaller home with a low down payment, $10,000 to $12,000 for a larger home with 20% down, and up to $20,000 or more for a million dollar plus abode.