How Do Mortgage Companies Come Up With Closing Costs?

Financing that new house requires some hefty closing costs.

Taking out a mortgage loan isn't inexpensive. The 2009 closing costs study by financial website Bankrate.com found that borrowers taking out $200,000 mortgage loans paid an average of $2,732 in origination and title fees, also known as closing costs. Mortgage lenders don't come up with these costs randomly; there are certain closing costs that buyers will always have to pay.

Title Fees

Before buying a house, you want to make sure that the person selling it to you is the legitimate owner. A title search proves this. It also ensures that there are no outstanding claims or liens against the home. Attorneys, title insurance companies or escrow agents usually perform these searches. Buyers usually have to pay for title insurance, too. This provides protection to the mortgage lender in case the agent performing the title search misses liens or outstanding claims on the property.

Loan Origination Fee

The loan origination fee is usually the largest closing cost that buyers pay. Your lender charges this, and it covers the work that mortgage lenders do in originating and processing your loan. Costs for this fee vary widely, but the Federal Reserve Board estimates that origination fees cost an average of $2,130 to $3,105 for borrowers putting 5 percent down on their mortgage loan.

Appraisal Fee

Before approving a mortgage loan, lenders want to make sure that your house is worth at least as much as what you are paying for it. An appraiser will make this determination by considering the amenities of the house you are buying and by looking at comparable home sales in the surrounding community. Buyers pay for the appraisal, which usually runs from $263 to $444, according to the Federal Reserve Board.

Homeowners Insurance

Lenders require that borrowers pay for their homeowners insurance coverage at the closing table. This cost is usually rolled into your monthly mortgage payment. The cost of this insurance varies, though the Federal Reserve Board estimates that homeowners pay $3.50 for every $1,000 of their home's purchase price.

Application Fee

Lenders charge an application fee to cover the initial costs of processing your loan. These fee also covers the cost of running your credit report. Again, this fee varies by bank or mortgage company--some don't charge it at all--but the Federal Reserve Board says that most application fees run from $65 to $640.

References

• Bankrate: 2009 Closing Costs Survey
• Federal Reserve Board: A Consumer's Guide To Mortgage Settlement Costs