Mortgage Closing Costs and Fees Explained

What are closing costs?

In a nutshell, closing costs are the fees that have to be paid before you can finalize the purchase of a home. Closing costs are calculated as a percentage of the home's purchase price and they usually run between 2 and 5 percent.

So for example, if you're buying a $200,000 home, your closing costs could be anywhere from $4,000 to $10,000.

Despite the expense of having to pay for closing costs when you buy a home, the good news is mortgage rates are low right now, which means it's a great time to buy. Get the latest mortgage rates for your area.

Closing costs can be broken down into a few different categories. The first covers all the fees the lender charges for processing your loan so you can actually buy the home.

The most common closing cost fees

• An application fee
• A fee for obtaining your credit report
• Loan origination fees (this fee covers the lender's administrative costs for finalizing your application and drawing up the loan paperwork)
• A fee to have the property appraised to determine what it's worth
• Inspection fees
• Mortgage points, which is a fee you pay up front so you can get a lower interest rate on the loan
• A commitment fee, which you'd pay to lock in your interest rate

Aside from what the lender charges, there are also fees for things like having the mortgage deed notarized and recorded with your local county tax office.

The attorney or agent who handles the final sign-off on all the paperwork also gets a fee.

Balancing closing costs and your student loans

If you've managed to save a down payment while still paying on your student loans, coming up with even more money for the closing costs can be a stretch.

You could ask the lender if they'll waive the fees altogether but that's usually a long shot.

So what are your options for covering closing costs when you're still battling student debt? There are two options that come to mind.

One way to go is to put your loans on forbearance temporarily and use the money you'd normally pay to build up a closing cost fund in a high-yield savings account or short-term CD.

Once you're settled into your new home, you can pick back up where you left off with your payments.

The only downside to this strategy is that the interest continues to grow on the loans in the meantime so your balance is going to be higher once you start making payments again.

For example, if you owe $30,000 at 6 percent and you take a six-month forbearance, your balance would go up by about $900.

Another possibility is a zero-closing cost loan, which some lenders offer to first-time buyers.

With this kind of loan, you pay nothing at closing but the trade-off is you get stuck with a higher interest rate.

That could mean paying thousands of dollars more in interest over the long term but you wouldn't have to derail your student loan repayment.

Negotiate your way to savings

Closing costs are typically the responsibility of the buyer but if you're a savvy negotiator, you may be able to get the seller to agree to cover some or all of the fees.

If the seller is anxious to get out of the property because they've already bought another home, for instance, they may be more likely to grant your request if they can't afford to have two mortgages hanging over their heads.

Keep in mind that the amount of closing costs the seller is able to pay depends on the type of loan.

With a conventional mortgage, the amount the seller can pony up for closing ranges from 3 to 9 percent, based on how much money you put down.

If you're taking out an FHA loan, the seller can can contribute up to 6 percent of the purchase price for closing costs.

Insurance and tax

If you're putting less than 20 percent down on the home, you'll have to get private mortgage insurance or PMI, which may need to be prepaid at closing. This kind of policy protects the lender if you end up defaulting on the mortgage.

This is different from title insurance, which is another one-time fee you'll have to pay.

Title insurance covers the lender in case you find out after the closing there's an issue with the title to the home that would put your ownership of it in question.

For instance, the seller forged the deed or there are liens against the home that you weren't aware of.

You'll also need to get homeowners insurance prior to closing.

Some lenders will allow you to roll the payments in with the mortgage but if you can't do that, you'll have to cover the first year's premiums out of pocket. You may also have to pay some or all of your property taxes in advance.

Tip: Your lender will give you a good faith estimate detailing all the loan fees within three days of receiving your application. This form should also tell you how much you're borrowing, what the interest rate is and what your monthly payments will be.

Check for discounts

Some lenders may be willing to cut you a deal on closing costs if you already have a history of doing business with them.

For example, Bank of America Preferred Rewards customers can get their loan origination fee cut by as much as $600 when they apply for a mortgage. Many smaller banks and credit unions offer similar deals so don't be afraid to ask for a discount.

The other place to look for savings is with your former school. A number of colleges and universities offer discount programs through their alumni associations for things like mortgage fees and insurance.

If you paid big bucks for your education, there's no reason not to try and get some of it back.