When you apply for a home loan, you’ll receive a Loan Estimate. By law, the lender must send this to you within three business days of applying for the loan. On this document, you’ll see closing costs, some of which are recurring and others that are non-recurring.
We’ll explore the differences below.
What are Non-Recurring Closing Costs?
While the names sound complicated, a majority of the closing costs you pay are non-recurring. In other words, you pay them once at the closing and never pay them again. The most common non-recurring costs pertain to the services you receive in order to close your loan.
The lender charges non-recurring costs, such as underwriting, processing, credit report services, origination fees, and discount points. You pay these fees at the closing for the work the lender does on your loan, but you don’t pay them again.
Other third-party services that are necessary to process your loan also charge one-time or non-recurring costs. They include services such as the appraisal, title work, title insurance, and attorney. You’ll also see fees such as recording fees, tax service fees, and courier fees, again all one-time fees.
You’ll know the estimated cost of these fees when you apply for the loan. Like we said above, the lender must send you a Loan Estimate that details these fees. You are free to shop around with different lenders and compare the Loan Estimates from each lender.
While you shouldn’t focus solely on closing costs, since you need to make sure you can afford the monthly payment, they should play a role in your decision. If nothing else, having multiple Loan Estimates gives you bargaining power when you want to negotiate with a specific lender.
What are Recurring Closing Costs?
Just like you pay non-recurring costs, you’ll pay recurring closing costs. As you probably guessed, these are costs that you pay repeatedly. The most common recurring costs include:
- Mortgage interest – Whether you have an adjustable rate or fixed rate loan, you pay interest for the loan’s term. Each month, a portion of your payment will cover the interest and some of the loan’s principal. As you pay your principal down, the amount you pay toward interest decreases. Your interest is figured based on the outstanding principal balance.
- Real estate taxes – Every county charges real estate taxes. You can find out the average cost in your area by talking to your realtor or checking your county’s website. You can even talk to the seller. Keep in mind, real estate taxes get paid every six months, and the amounts can fluctuate. Every couple of years the county will reassess your home’s value, which will affect how much you owe in taxes.
- Homeowner’s insurance – Your mortgage company will require you to carry enough homeowner’s insurance to cover the home’s value. If you don’t carry it, the lender will place a policy for you (called force placing). This usually comes at a much higher premium and less desirable terms. The lender just wants to protect their interest. Keep current on your homeowner’s insurance and pay the premium annually (or monthly if you set up an escrow account).
- Flood insurance – If you live in a flood zone, you must pay flood insurance. Again, the lender will require it. Flood insurance is typically much more expensive than standard home insurance, so make sure you get the policy yourself to avoid inflated premiums due to a force-placed policy by the lender.
- Private mortgage insurance – If you put down less than 20% on your home with conventional financing or you take out FHA or USDA financing, you’ll pay mortgage insurance. Conventional loans require PMI until you owe less than 80% of the home’s original value. FHA and USDA loans require mortgage insurance for the life of the loan. In other words, you pay the premiums until you pay off the loan by selling the home or refinancing the loan.
Negotiating Non-Recurring Closing Costs
Typically, you can negotiate non-recurring closing costs. As we said above, shop around to find the best deal. If you find a lender that charges a little more for certain fees, but that you want to work with, consider negotiating the higher fees.
Most lenders will work with you regarding fees such as origination fees and discount points. They may even waive underwriting or processing fees. You may have a harder time negotiating third party fees, such as appraisal, attorney, or title fees, but you are ready to shop around and find your own vendors, if you wish. Some lenders frown upon this, though, so always check with the lender first.
Negotiating Recurring Closing Costs
Some recurring closing costs also allow some room for negotiation. For example, you can negotiate your interest rate. That’s a big part of your loan and worth the effort. You may also be able to negotiate or at least shop around for home insurance. You won’t be able to negotiate your property taxes unfortunately but if you feel they are unfair, you can file a dispute to see if you can get them lowered through the county.
Closing costs are a part of the home loan process. You’ll pay both recurring and non-recurring closing costs. Keep a close eye on what you are paying and negotiate what you can to keep your costs as low as possible.