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How Are Closing Costs Calculated?

With the help of a great mortgage provider, purchasing a home in Arizona can be a gratifying experience. However, processing your loan also requires a lot of time and commitment from multiple third-party entities. That is why mortgages include closing costs. How are closing costs calculated?

Before you make an offer on a home, you must understand what closing costs are so you can make the best decisions for your financial future.

Below, we break down the various fees often included in closing costs. We even show you how to reduce closing costs and save big with the home loan you choose.

What Are Closing Costs?

Closing costs are the different fees you have to pay when you’re completing a real estate transaction. These costs can be paid by the buyer, the seller or split between the two. They are sometimes rolled into the loan or paid upfront as well.

When you’re negotiating your home purchase, it is essential to address who will pay closing costs. If a homebuyer does not want to fork over extra cash at closing, they can ask the seller to pay the majority of closing costs, depending on how competitive the market is. This is a common practice, but sellers sometimes respond by increasing the home’s purchase price to offset the added cost.

Why Are Closing Costs Required?

Chances are, you’re already making a down payment at closing. So why are closing costs even required?

If you choose a reputable lender and mortgage broker,  the homebuying process probably seems incredibly easy. But while closing on your loan might have been simple from your perspective, it actually involves lots of moving parts.

Certain types of loans (and some states) require specific appraisals or inspections before you can buy a home. These additional requirements drive up the cost of processing your mortgage.

In addition to appraisal costs, buying a home also requires transfer fees, property taxes and insurance coverage. You may also have to pay for document prep and attorney’s fees, as the title company checks on the property’s history for the lender to assure clean title. Closing costs are meant to offset all of these expenses.

How Much Should I Expect to Pay in Closing Costs?

Generally, your closing costs will be approximately 1-4% of the purchase price of your home.

Let’s say you’re buying a home that costs $350,000. Closing costs for this property might range from $3,500 to $14,000. The exact amount of your closing costs will vary depending on factors such as:

  • The state you live in
  • The type of loan you’re using
  • The title company, appraiser and lender you use

Fortunately, the average closing costs in Arizona are some of the lowest in the nation averaging $4,190.34. Homebuyers seeking to lower these costs will likely have different options to choose from that drive this number downward.

While your actual closing costs may fluctuate slightly through the homebuying process, lenders are required to send you a loan estimate within three days of receiving your application.

Three days before your closing date, the lender will send you a  “closing disclosure.” This document will show both the original estimate and your final closing costs. If you notice a major increase in your closing costs, reach out to your lender immediately.

Common Closing Cost Fees

When you receive your closing disclosure form, it will contain an itemized list of every fee that contributed to the final tally. However, the document does not explain what each of these fees are. That is why we have defined some of the most common closing cost fees below.

Keep in mind you may not be charged all of these fees, as they may not apply to the home or property you’re purchasing.

Application Fees

Many mortgage lenders charge application fees for processing your loan. Before filing a loan application, make sure to ask for details. If the application fee is excessive and exceeds $1,000, then you may want to keep searching for a lending partner.

Attorney Fees

Real estate attorneys are responsible for preparing and reviewing home purchasing contracts. However, not all states require attorneys to be involved in real estate transactions. Arizona is one of these states, which is one of the reasons that closing costs are so low.

Escrow Fees

Often referred to as a “closing fee,” escrow fees are paid to a third-party overseeing the closing. This entity may be an escrow company, an attorney or a title company.

Some of these funds are used to cover the costs of using the title company, while the rest is placed in an escrow account. Funds in escrow are used to pay your homeowners insurance and property taxes every year.

Courier Fees

An increasing number of lenders are transitioning to electronic closings. However, some still rely on paper documents. If your closing involves traditional documents, then you may be charged a courier fee to expedite delivery of your loan documents.

Credit Reporting Fee

To approve your loan, mortgage lenders must first obtain your credit report. Sometimes, they will charge a fee for pulling this report. Other mortgage lenders will waive the fee because they get discounts from the three credit reporting agencies: Equifax, Experian and TransUnion.

Escrow Deposit Amount

Some lenders may require an additional escrow deposit amount. If you have to pay an escrow deposit, it will often include at least two months of mortgage insurance payments and property taxes.

Once your loan is closed, a portion of each mortgage payment is deposited into the escrow account. Throughout the year, these funds are used to pay your property taxes, mortgage insurance and homeowners insurance premiums.

Mortgage Insurance Premium (FHA Only)

FHA loans are an extremely popular mortgage option because they offer favorable terms and flexible requirements. However, FHA loans also require an UPMIP (upfront mortgage insurance premium). The UPMIP is 1.75% of your base loan total. If your base loan amount is $200,000, then the UPMIP would be $3,500.

In addition, you’ll be charged a mortgage insurance premium monthly, which will roll into your payment until you’ve paid down the loan to a certain value.

Flood Monitoring Fee and Flood Insurance

Certain properties must be assessed by a flood inspector, even in Arizona. The inspector will identify whether your home is in a flood zone. If it is, then you will have to obtain flood insurance. The flood monitoring fee will also cover future observation services to detect changes in your property’s status.

HOA Transfer Fees

If you’re purchasing a townhouse, property or condo in a pre-planned development, you might be required to join a homeowners association (HOA). To sign up, you or the seller may have to pay fees. However, this detail is sometimes left out of the purchase contract, so clarify any homeowners’ fees that may be due before closing.

Homeowners Insurance

Lenders almost always require an upfront payment of a year’s worth of homeowners insurance coverage at your closing. This fee can occasionally be rolled into your loan amount, but many lenders will charge a slightly higher interest rate when you take advantage of this option.

Title Insurance (Owner and Lender)

Buyers who use financing are required to purchase title insurance to protect the lender, but they may also get coverage to protect their own interests in the property. This fee is dispensed to the title company and is designed to protect you if there is an ownership dispute.

While the property in question will be subject to an extensive title search before closing, mistakes happen. Title insurance protects your investment if a worst-case scenario were to occur.

Discount Points

Discount points are awarded if you elect to make an upfront, optional payment at closing. In exchange for extra funds, the lender will apply points to your loan and lower the interest rate for your loan.

Typically, one point will equal 1% of your loan amount. If mortgage rates are already low, discount points may not translate to long-term savings.

Origination Charges

Third-party entities are not the only ones that invest time and money into processing your loan. Your mortgage lender also has administrative costs. They will often charge an origination fee of 1% of your loan amount to cover these expenses. Not all lenders charge origination fees, but those that do not will often charge higher interest rates.

PMI

FHA loans are not the only types of mortgages that require private mortgage insurance (PMI). If you put less than 20% down on your home, then PMI may be required on conventional loans as well. Once your loan-to-value ratio drops below 80%, then PMI will no longer be required.

If you purchased a $300,000 home and only put 10% down, then you will have financed about $270,000. Once you have paid your loan down to $240,000 or less, then your PMI can be removed from a conventional mortgage. Keep in mind you may have to refinance in order to remove the PMI on an FHA loan, though.

Appraisal Fees

A professional home appraisal firm will need to assess the fair market value of the property you’re bidding on. The fee usually ranges from $450 to $750.

Property Taxes

Sellers have to pay a prorated amount of property taxes at closing, but your lender may also require you to put money in escrow toward your next property tax bill.

Rate Lock Fee

When you receive a mortgage loan estimate, the lender could charge a fee for locking in the projected interest rate. Some lenders offer free rate locks for a certain period of time. If your loan doesn’t close within that time frame, you may have to pay more to maintain the locked-in rate.

Real Estate Agent Commissions

Real estate agent commissions are one of the biggest fees you’ll encounter. Fortunately, sellers typically pay this fee. The commission is often 5-6% of the home’s purchase price, which can be split between the buyer’s agent and the listing agent.

Recording Fees

Local records offices sometimes charge “recording fees,” that cover the cost of processing public land records.

Survey Fees

A survey company might need to verify property lines to confirm the boundaries of your real estate. This fee could be increased if you are purchasing a large property.

Title Search Fees

The title company is responsible for reviewing property records to verify no potential ownership discrepancies or outstanding liens. This fee is generally a few hundred dollars.

Underwriting Fees

Underwriting fees are also paid to the lender. These fees are charges for evaluating your mortgage application and providing final approval of the loan. Underwriters are tasked with verifying your employment status, credit information and income.

Is There a Way to Reduce Closing Costs?

There sure are. Shop around for the best rates, negotiate with the seller and ask them to pay closing costs.. Oftentimes, mortgage brokers or banks can structure a loan where credits cover most if not all closings costs. While these methods can save you some cash, the best advice is to partner with a customer-focused mortgage team like Agave Home Loans.

At Agave Home Loans, we always put our clients first. We take the time to understand your unique needs so we can find the perfect mortgage solution for you. If you’d like to learn more or obtain a quote on a home loan, contact us today!

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Marshall Gottlieb - Co-Owner and CEO
Marshall spent seven years in hospitality and the restaurant industry prior to beginning a career in real estate and lending. After obtaining a finance degree with an emphasis in investments from Northern Arizona University, he began working at Quicken Loans. He spent seven years there as a banker and then Senior Director prior to co-founding Agave Home Loans. (NMLS ID: #1107208)
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