What are the Closing Costs When Buying A Home?
Closing costs are usually one of the last things a home buyer thinks about when purchasing a home. Although getting to the closing table and walking away with the keys to your brand new home is exciting, the actual closing costs associated with buying a home can be surprising if you’re not prepared.
You’ll go through a period called escrow when buying a home where the issues dealing with purchasing a home are sorted out. The closing signals the last day of the escrow period, and this is where you’ll pay closing costs when you actually buy a home.
There are different forms of closing costs. While some of these costs are minor, some are quite significant. This article looks at different types of closing costs so you’re prepared before sitting down at the closing table.
A third party whose job it is to double-check everything and finalize a home sale, the escrow agent charges a fee for escrow services. The amount of this escrow fee varies depending on the mortgage company, real estate agent, and area, but it’s usually somewhere between a few hundred and a thousand to two thousand dollars. If you can, choose your own escrow agent to minimize the fees you’ll pay.
Home Insurance And Title Insurance
When you buy a home, getting title insurance and home insurance is smart. In fact, if you’re financing your home purchase with a mortgage loan, your mortgage company will require you to get title insurance and home insurance. Even if you’re lucky enough to pay cash for a home, getting insured is a great idea because it protects you if issues with your title come up, and will protect you in the event of home damage or disaster.
Depending on where you get your home loan, you may have to pay points as part of your closing costs. Points are fees typically built into a loan, but that can be a separate fee paid, which is essentially a fee assessed for being given the privilege of borrowing money. It sounds crazy, but it’s true. Each point paid is usually equivalent to 1% to 2% of your loan. For example, a 1% point fee on a $200,000 loan would be $2,000. Shop around for a lender that won’t charge you points to avoid this fee, especially if you have great credit.
PMI, also known as Private Mortgage Insurance, is usually a mandatory closing cost for loans where you put down less than 20% of the sales price of a home. While PMI is considered a closing cost, it’s something you’ll pay year after year unless you refinance your loan later after you have paid down at least 20%. PMI payments can total as much as several hundred dollars per year.
Prepaid fees fit into the closing costs of most loans and they include prepaying items like your mortgage interest and property taxes. Sometimes the interest on your first mortgage payment accumulates before you make your first payment so the mortgage company gets that interest as a prepaid closing cost. Since the seller paid property taxes on the home for the entire year but sells before the year is up, you reimburse him for the property taxes he paid in the form of prepaid fee closing costs.
This is a fee charged by your local governing authority when they officially record the deed. Also called recording taxes, sometimes you can negotiate with the seller to pay recording fees, but it’s usually attached to the buyer as a closing cost.
Miscellaneous Lender Fees
Miscellaneous lender fees include any extras the lender pays for, including a credit report fee, loan origination fee that covers the administration and financing of your mortgage, processing fee, underwriting fee, and even commissions. These closing costs can add up quickly, but many lenders will negotiate the payment of these miscellaneous fees with you. It never hurts to check.
Other Closing Costs
As part of the home buying process, you may have to pay other types of closing costs as well. Most of these extra closing costs have to do with the validation of the property in the form of appraisals and home inspections. These fees are included in mortgage loans in some states, but not all.
There are many closing costs associated with buying a home, but if you know exactly what you’ll have to pay at the closing table, you won’t have a big surprise at closing that empties your bank account. Closing costs will also vary, depending on your locale, so it’s a good idea to consult with a real estate agent or lawyer beforehand.
Lender’s Points, Loan Origination, Or Loan Service Fees
A point is one percent of the loan amount. Lenders often charge points to give you the lowest rate possible. Some lenders won’t charge points for making the loan but might charge loan origination or loan service fees. These fees range from zero to three percent (or more) of the loan amount.
Loan Application Fee
This fee, the lender’s non-refundable charge for taking your application, ranges from $0 to $50.
Lender’s Credit Report
The lender will hire a credit bureau to run a credit check on you. The lender is charged for the service and passes along that cost to you. This fee ranges anywhere from $40 to $150 or more.
Lender’s Processing Fee
This is a charge for pushing papers around the office. In this age of four-minute computer-assisted loan approvals, this fee of $75 to $150 may be negotiable.
Lender’s Document Preparation Fee
Often considered a junk fee, especially since many of the forms are stored in the computer, this charge usually runs from $50 to $200.
Lender’s Appraisal Fee
Once you’ve applied for the loan, the lender has to make sure that your home is actually worth what you’re paying for it because you’re using it as collateral for the loan. Lenders tend to charge you what they’re charged by appraisers–usually $200 to $450 or more.
Prepaid Interest On The Loan
This is the daily cost of your loan from the day of the closing through the end of the month in which the closing occurs. Although you usually pay your mortgage in arrears (say, on July 1 for June), this cash is due upfront at the closing.
Lender’s Insurance Escrow
Most lenders will want you to have an insurance escrow, in which they keep enough cash to pay your annual insurance premium plus a cushion of two months’ worth of premiums. You usually pay the first year’s premium upfront at or before the closing, plus an additional amount to help build the escrow for the second year’s premium.
Lender’s Real Estate Property Tax Escrow
Alongside the insurance escrow, the lender collects from you and then holds in your account, enough cash to pay your annual property tax bill, plus an extra 1/6 (or, two months’ worth). Before the closing, you’ll kick off the account by putting in anywhere from 33 percent to 50 percent of the next estimated tax bill, depending on when you expect to close and when the next tax payment is due. (After closing, you’ll make monthly insurance and property tax escrow payments along with your monthly mortgage payment).
Lender’s Tax Escrow Service Fee
This fee, to set up the escrow, can run anywhere from $40 to $80 or more.
Title Insurance Cost For The Owner’s And Lender’s PolicyLenders want to be sure that their interest in your property is insured by the title insurance company. The cost for this coverage is based on the dollar amount of the mortgage you obtain from your lender.
Special Endorsements To The Title
Depending on the type of property you pick, your lender may request that special endorsements be added when the lender’s title policy becomes final. An endorsement is specific insurance coverage that the lender wants only for his or her benefit and protection. A location endorsement, which guarantees that the home is located as described in the loan, may cost $15. If you choose an adjustable-rate mortgage (ARM), the variable rate endorsement may cost another $60, depending on the title company and the state in which you are located. For a townhouse, there may be a PUD (planned unit development) endorsement. For $15 to $50 each, endorsements can add a chunk of money to your closing costs. (These costs fluctuate from state to state and from title company to title company, and are subject to local custom).
House Inspection fees
if you have your home inspected by a professional home inspector, he or she will probably insist on being paid when the work is completed. But if for some reason, you haven’t already paid this cost, it will be tacked on at the closing. These days, professional home inspectors and structural engineers often charge for their services based on the price of the home. Expect to pay $225 to $400 or more.
Title Company Or Escrow Company Closing FeeThis fee can run anywhere from $150 to $400 and up.
After you close on your home, your deed and your mortgage must be recorded with the county in which the home is located. This cost usually runs from $25 to $75.
Local (City, Town, Or Village), County, And State Property Transfer TaxesAlso known as stamp taxes (because you’re often given a stamp to paste on the deed), transfer taxes are another way for your town, county, and state to raise revenues. Essentially, you and the seller are being charged for buying and selling property. The charges that you, the buyer, will pay vary from city to city and from state to state. Sometimes the seller picks up the entire cost; sometimes the buyer does. In general, property transfer taxes can range from $0 to $5 per $1,000 of the purchase price, or more. In some areas, you may be assessed a flat fee of $25 or $50 per transaction.
Whether you decide to get an attorney to help you through the home-buying process depends in large part on local custom. In Indiana and California, buyers and sellers are discouraged from using attorneys. In other parts of the Midwest and the Northeast, they’re commonly used. If you need an attorney, you can often negotiate a flat fee, which might start at around $300 but will go up according to the experience of the attorney and how complicated your transaction is. In some places, it may be difficult to find an attorney who will charge only a flat fee. You’ll then have to pay an hourly rate, which could run anywhere from $80 to $200 an hour, or more closing costs.
Condo Move-in Fee
When it’s imposed by an association, this charge can range from almost nothing to more than $400.
Co-op Apartment Fees
Some co-op associations require a small fee for transferring shares of stock, doing name searches, and/or moving in. Each of these fees can range from $50 to more than $500.
Credit Checks For Condo And Co-op BuildingsSome condos and co-ops will want to check your credit before they allow you to move into the building. If a fee is charged, it can range from about $75 or more.