August 28th, 2019 4:00 PM by Davis Love
So you want to buy a home, and you need a mortgage. But how much is that going to cost, nevermind the big price tag on the house you want? This is hard information to find, and a difficult question to answer. But, with some knowledge about what kind of things you'll have to pay for, you can ask the right questions and make a much more educated guess.
Let’s start with a few easy points:
A survey published by ClosingCorp indicated average closing costs in South Carolina in 2018 were $2,352, plus prepaids, taxes and insurance.
Prepaids, taxes and insurance are reflected under “other costs” at closing, and often can add up to as much as the average closing costs
Cash to close = Down Payment + Closing Costs + Other Costs - Credits
The general term for the money you have to spend to get a mortgage is “closing costs.” Closing costs are exactly what they sound like: money that you have to pay in order to "close" your mortgage loan and get the funds to buy your new house. However, most definitions of closing costs won't include all of the “cash to close," that is, all of the money that you will have to pay at your closing.
These are common categories included in closing costs:
Credit Report Fee
Two important categories that are typically counted as “other costs” but will be a significant part of your cash to close are:
Initial Escrow Payment
Finally, there are four other key categories to consider:
Earnest Money Deposit
Discount Points/Lender Credits
OK, now that we have all of the confusing terms on the table, let’s talk about what it means to you.
Origination Charges. These are fees that your lender charges for giving you the money you need for your mortgage loan. These will vary based on your lender. The manner in which this is calculated also changes based on whether your loan is originated internally by the lender, or by an independent mortgage broker like us at Pathway Mortgage. That being said, you will typically find either a 0.5%-1% origination fee on your loan documents, or you will find a flat fee between $800-$1,100. If you are using an independent mortgage broker/originator like our office, note that our compensation is typically paid by the lender, and is accounted for in the interest rate that the lender offers.
Another item you will find under origination charges is “discount points.” These are discussed in somewhat more detail below, but a discount point is a fee charged by the lender in order to get the interest rate that is associated with your loan. A higher interest rate sometimes will have a credit, rather than a cost, associated with the rate.
Appraisal Fee. Generally speaking, all lenders will require the property to be appraised prior to funding a loan. Appraisal fees as of today are typically between $500-$600.
Credit Report Fee. Your lender will require an up to date credit report in your file. If your credit is in great shape and simply needs to be pulled one time, this fee is usually between $35-$50. If your credit needs some work, your loan originator may be able to help you make quick improvements and update your report, but this may include additional fees.
Attorney/Title Fees. In South Carolina, an attorney is required to perform your title work and settlement services. Therefore, you will have attorney and title fees as part of your closing costs, and the services are often all provided by the law firm who performs your closing. These fees of course vary depending on the firm you choose for your closing.
Mortgage Recording Fee. Your closing attorney/agent will have to record your mortgage. The typical cost for this currently in South Carolina is between $35-$40.
So, these are the big categories that are usually included in the definition of closing costs. As stated above, according to at least one survey, these costs on average in South Carolina added up to $2,352 in 2018.
But, the “other costs” category is a big part of what you have to pay at closing. To really know the amount of money you’ll need to pay to close on your loan, you need to factor in your prepaids and initial escrow payment.
Prepaids. Prepaids are charges that you will prepay at your closing for your homeowner’s insurance and interest charges.
Typically, your first full year of homeowner’s insurance will be collected at closing. The insurance policy that you choose for your home will have an annual premium associated with it, and the first full year will be due at closing. Homeowner’s insurance premiums vary significantly depending on your home value and the extent of coverage you choose, but on a home price around $200,000 can often be found between $600-$1,300. If you are in a flood hazard area or have other special considerations such as this, your insurance will be significantly higher.
Interest will be collected at the daily rate for your interest rate for the number of days between your closing date and the end of the month. For example, if your interest rate is 3.75% on a $200,000 loan, your daily interest would be $20.50. If your closing took place with 15 days left in the month, your prepaid interest would $20.50 x 15 days.
The moral of the story here is that your prepaids depend on 1) the cost of your homeowner’s insurance (which you are free to shop around for), and 2) how many days of interest need to be paid on the day of your closing.
Initial Escrow Payment. Most loans have an “escrow account.” At the risk of oversimplifying, an escrow account is a separate account from your mortgage that your lender uses to pay your homeowner’s insurance, mortgage insurance and property taxes. Therefore, like prepaids, this payment will depend on the cost of those items. Your lender will usually collect enough to have at least a few months "reserves" in your escrow account.
Again, prepaids and escrow are not included in the typical definition of closing costs, and you will see them lumped into the “other costs” category. This is because they are not necessarily the cost of getting a mortgage, so much as they are cost of owning a home. When you close on your mortgage, you are simply paying up front money that will then be spent on those items over time.
Mortgage Insurance/Funding Fees. One last category to note is mortgage insurance or VA Funding Fees. If you are getting a government backed or insured mortgage - FHA, USDA or VA - you will have either an upfront mortgage insurance fee or a VA funding fee added to your loan. A later post will discuss these in detail, but while they are reflected on your closing cost documents, these costs are typically included in your loan amount, rather than paid by you at closing. Therefore, you will see these charges on your loan documents on those types of mortgages, but typically they are going to increase the total amount of your loan, rather than be part of your cash to close.
As you can see, your prepaid items and initial escrow payment will usually add a significant dollar amount to your total cash to close.
Now that you have all of these variable costs in mind, let’s look at the other categories that are key in determining your cash to close:
Down Payment. This one is probably obvious. Most, but not all, loan programs require you to make a down payment equal to a certain percentage of your sales price. Your “cash to close” is essentially calculated by adding Down Payment + Closing Costs + Other Costs. Note that, depending on the deposits and credits identified in the categories below, your cash to close can sometimes be lower than your down payment amount.
Earnest Money Deposit. Most real estate contracts require you to deposit (i.e. write a check for) some amount of money when you enter into a contract to purchase a home. This amount often ranges between $500 - $2,000. When you close on your mortgage, the deposit that you made is credited towards your closing costs, and therefore subtracted from your cash to close number.
Seller Credits. Many buyers negotiate with sellers for the sellers to pay a certain amount of the buyer’s closing costs. These are reflected as “seller credits” on your loan documents, and will be subtracted from your cash to close number. Note, these will not change the money due at closing, they will simply move the amount from your column (the buyer) to the seller’s column.
Discount Points/Lender Credits. Finally, you should know that your interest rate comes at a price. In other words, you will usually either pay or receive a credit for the interest rate that is associated with your loan. This is reflected as a percentage of your loan amount. One “discount point” is equal to one percent of your loan. For example, if you have a 200,000 loan, and you want a 3.5% interest rate, which has a 1.0 discount point, you will pay at closing 1% of $200,000, or $2,000. Often times, these discount points are fractions of a point, such as .25%. On the other hand, your interest rate may come with a credit, such as -.25%. This means that you would receive a credit from the lender in the amount of .25% of your loan amount, and it would be reflected on your loan documents as a lender credit.
In sum, the answer to the question of “how much does it cost to get a mortgage” is, it depends. But I hope this article gives you an idea of some of the typical numbers. More importantly, I hope this article gives you an idea of what categories of costs you should be looking out for when you apply for a loan, and allows you to ask the right questions to make sure you’re getting the best loan for you!
Always feel free to call or email us for more information about the cost of getting a mortgage. --Davis Love (864) 814-0710Davis@pathwaymortgage.org NMLS# 1866217