You know saving for a down payment is often the biggest hurdle for most homebuyers. But have you thought about the thousands of dollars more you’ll need for closing costs? That’s right, thousands more.
Fortunately for you, you’ve found this blog, and in it we’ll outline just exactly what closing costs are, and how much you might need so that you can have a realistic idea of what it takes to complete a home purchase. Our hope is that by educating potential buyers on all aspects of the home buying process, we can help reduce any unforeseen financial barriers when closing on a new home.
What exactly are closing costs, anyway?
In short, closing costs are all the fees associated with the processing and filing of loan documents and paperwork for your home purchase. At face value, “processing fees” doesn’t sound all that monumental, but in actuality they are complex and the amount can vary drastically based on where you live and the cost of your home. As an estimate, you should plan on your closing costs being about 2-6% of the loan amount.
While the specific fees vary from loan to loan, here are some of the fees that can be included in closing costs:
1. Loan costs
There are many different fees that go into loan costs:
Discount Points
For most loans, a discount point is a fee that you pay in advance to get a lower interest rate on your mortgage. This has the advantage of decreasing your monthly mortgage payment, but may get expensive, as discount points are calculated as a percent of the total purchase price. Fortunately, discount points are optional.
Courier Fee
A courier fee is charged to pay for the transportation of hand signed documents during your transaction.
Credit report fee
A credit report fee is a charge from the lender to run a credit check.
Flood certificate fee
A flood certificate fee is charged to pay for a professional to determine if the property you will purchase is in a flood zone. In some cases, this includes flood monitoring as well.
Insurance monitoring fee
An insurance monitoring fee is a third-party fee paid in order to keep track of your insurance payments and notify your lender of issues that arise, such as failure to make payments.
Appraisal fee
An appraisal fee is the cost that you pay for a licensed professional to estimate the market value of the house that you are purchasing. Lenders require appraisals when you take out a mortgage or go to refinance a home. The general idea is that lenders want to be sure that the home is worth the purchase price so that, in the event of a default on the mortgage, the home can be sold to cover any losses they incur. Appraisal fees can be anywhere from a few hundred dollars to upward of $700.
Title fees
Title settlement fees vary based on what state you are buying in. This fee is charged from a title company to pay for costs associated with closing. The cost of the title settlement fee generally covers the handling and the divvying out of the funds (escrow), in addition to other administrative or processing fees that come with closing the transaction. This fee varies but can run some buyers up a few thousand dollars depending on the loan amount.
There are a number of other title (or escrow) related fees that you may or may not be responsible for:
Title-endorsement fee
Title-escrow-courier fee
Title-escrow notary fee
Service fee
Title insurance
There are a variety of service and processing fees as well:
Document preparation fee
Processing fee
Tax service fee
2. Other Costs
Taxes & other government fees
You should expect to see tax fees included in your closing costs. One example, a recording fee, is the costs paid to file the deed and other official documentation with your county’s public records. Other fees, such as city tax and county tax, may be applied and depend on a variety of variables. In some cases, the seller is responsible for the transfer tax, but in others the buyer is.
3. Prepaid Costs
Homeowner’s insurance premium
Typically, the first year of homeowner's insurance premium is prepaid at closing.
Mortgage insurance premium (MIP)
A mortgage insurance premium is a policy used for FHA loans if your down payment is below 20% of the purchase price. If you have an FHA loan and put less than 20% down you will need to pay the MIP either upfront in your closing costs or annually.
Prepaid interest
Prepaid interest covers interest on the mortgage that accrues between the date of closing and your first monthly payment.
Property tax
Also included in prepaid costs are property taxes. You should expect to pay a certain amount of property tax from your closing date through the end of that tax year.
Ultimately, the amount that a buyer ends up paying in closing costs varies by state, the price of the home, and the lender (to an extent). Some regions in the country have higher closing costs than others and some loan programs offer closing cost assistance without repayment. You can always look for opportunities while shopping for lenders to ask them about loan fees (and negotiate to lower them where possible). In some cases you can appeal to the seller and see if they will help with the closing costs, but that isn’t likely to happen in a seller’s market.
When you’re starting to think about your first home purchase and how much you’ll need for a down payment, don’t forget to factor in your closing costs! There are a number of online closing cost estimators, like this one from NerdWallet, that can be a tool to help you prepare.