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Closing Costs Explained

As homebuyers quickly discover, there are countless things to understand during the mortgage process. You may have to sell your current home, negotiate a deal on a new house and shop for a loan with an attractive interest rate. One often overlooked aspect of buying real estate – and obtaining a mortgage – is the added expense of closing costs on a home. Here are some answers to some frequently asked questions about mortgage loan closing costs. It’s likely, however, you’ll also want to speak to someone with expertise on the topic, and E-Central Credit Union’s knowledgeable loan officers are ready to help.

What are closing costs?

Put simply, closing costs are expenses over and above the interest rate on the mortgage loan. The closing costs on a house are collected by the lender and cover services performed by either the lending institution or an outside party, such as a home appraiser.

How many types of closing costs are there?

Closing costs vary state by state and institution by institution. Some websites list as many as 27 possible charges, but very few consumers pay all of these. At E-Central, we strive to limit closing costs and keep loans as affordable as possible.

How much can closing costs on a home purchase add to a real estate transaction?

The national average of closing costs is between 2% and 5% of the mortgage. So, on a $200,000 mortgage, closing costs can add up to $5,000. According to Bankrate, the average closing costs in Los Angeles, CA for a $200,000 home loan are $2,257.

What is included in closing costs?

To cover their expenses in processing loan applications, mortgage lenders often charge an application fee and loan origination fee. Some origination fees are a flat rate, and some are a percentage of loan value. On a $200,000 mortgage, the two fees usually total between $1,000 and $1,500.

Are “points” on a loan part of the closing costs?

Points on a loan can be part of closing costs. Formally called “discount points,” they are technically prepaid interest on a loan. Each point equals 1% of the loan value. But it’s more useful to think of points as a way of “buying” a lower interest rate. One example: You are looking at a 30-year fixed mortgage at 4.00% APR. If you are willing to pay an additional point – that is, $2,000 on a $200,000 loan – the rate drops to 3.75% APR. Those willing to pay 2 points ($4,000 in this example) get a rate of 3.5%.

Do all closing costs apply to services offered by the lender?

Closing costs often include fees beyond your lender. For example, an appraiser chosen by the lender will visit the property you want to buy and estimate its value. The reason? If you run into financial trouble, the lender wants to be sure it can sell the property for enough to repay the loan. Another common closing cost is a title search fee, paid to a company that does research to ensure that no one else has a legal claim to the property being purchased.

Can I get a breakdown of closing costs before I commit to a loan?

You can get a rough estimate of closing costs by using one of the many closing costs calculators online. An even better idea is to contact the loan officers at E-Central Credit Union in Pasadena, CA. Like all reputable lenders, we will provide a form called a “Good Faith Estimate” that details the closing costs for the mortgage you’re applying for. You should always understand exactly what you will owe.

I want to apply for a Federal Housing Administration (FHA) mortgage. Is there anything I should know about FHA closing costs?

The federal government defines which closing costs are allowable as a charge to the borrower and sets limits on those fees. Many lenders’ websites also include closing cost calculators for FHA loans.

How do I pay the closing costs?

Closing costs should be paid from your savings account the day you close on your mortgage, or you can ask if your lender will roll them into your loan total. The latter approach will make your monthly mortgage payments higher but can ease the initial cost of buying a home in California. E-Central Credit Union’s loan officers are a great source of information about closing costs in California and can help provide you with more specific details.

Everything, everywhere

E-Central Credit Union is a leading credit union located in Pasadena, California, serving Southern California members throughout Los Angeles County including Pasadena, South Pasadena, Alhambra, San Marino, Arcadia, Sierra Madre, Altadena, Temple City, Monrovia and beyond.