Closing Costs: What to Expect and What to Look For

You’ve done the work to get pre-approved for a loan. You’ve talked with your loan officer, figured out your budget, and decided how much you can put down. But there’s one more big factor to consider: closing costs.

A purchase transaction involves several third-party companies; title company, appraiser, credit bureau, and others, and each one needs to be compensated for their work. Those fees, along with taxes and insurance, show up on a document called the Loan Estimate. Below, we’ll walk through each section so you know what to expect, and what to watch for to make sure your lender isn’t overcharging you.

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The rate on Page 1 of the Loan Estimate doesn’t mean much if you don’t know what you’re paying to get it. That’s why the real comparison happens on Page 2, where loan costs are broken into labeled boxes. Understanding what belongs in each box makes it much easier to compare quotes from different lenders apples-to-apples.

Box A: Origination Charges

This is what the lender charges for the loan itself, including any cost tied to your interest rate. You’ll typically see a flat fee, labeled something like “Administration,” “Underwriting,” or “Processing”, which reflects the lender’s fixed costs. You may also see a percentage-based fee called points, which represents what you’re paying for your rate.

• If that points charge is small, under about 0.25%, you’re close to what’s called par, or a true market rate.
• If it’s closer to 1% or more, you may be overpaying for your rate.

Keep in mind this varies by lender and isn’t standardized, so it’s worth comparing across quotes.

Box B: Services You Cannot Shop For

These are fixed costs the borrower can’t shop around for, and lenders can’t inflate them. This box includes things like the credit report fee, appraisal fee, and county recording fees.

This is also where we’ve seen some mortgage brokers try to slip in a hidden fee: a third-party processing fee. This is a charge, sometimes as high as $1,500, paid to a separate company to process your loan so the loan officer doesn’t have to do the work themselves. Retail lenders and banks often get criticized for higher overall costs, but this is one area where certain brokers have quietly raised their own costs without adding any real service or benefit for the borrower. And marking it as a fee you can not shop for is deceptive. Either request that they not use a processing company or get a comparison from another lender.

Box C: Services You Can Shop For

These are mainly title company fees. Technically, you can shop around for these, but most borrowers don’t have existing contacts and go with whoever the realtor or lender recommends. Title company fees vary somewhat, though most charge some form of escrow or closing fee. In Texas, the title insurance premium itself is state-regulated, so that portion is the same no matter which title company you use. A survey, if needed, is one area where you do have a real choice.

Boxes E Through H: Other Costs

These items; property taxes, homeowners insurance, and setting up your escrow account, will be roughly the same no matter which lender or title company you choose, so they shouldn’t be a major factor in your comparison. One thing worth watching for: if a lender’s estimate for taxes and insurance looks noticeably low compared to others, they may be underestimating it on purpose to make your total cash-to-close look smaller and distract from a larger fee structure elsewhere.

The Bottom Line

When you’re comparing lenders on rate and cost, focus on the interest rate along with the totals in Boxes A and B. A lender might advertise a lower rate while burying the cost of that rate in origination charges or other fees. Every lender has real operating costs: rent, systems, staff, loan officer commissions, and those costs get paid one way or another: through a higher rate, higher fees, or some combination of both. Knowing where to look on the Loan Estimate is how you make sure you’re seeing the full picture.