What Are Closing Costs?
When you buy a home, one of your main objectives is to save money by negotiating a fair purchase price. But the upfront costs of buying a home can be hard to estimate.
Closing costs are the expenses incurred when buying a home: the fees, taxes and monies due on the day you sign paperwork and finalize the purchase. At that time, the property ownership is transferred from the seller to the buyer. And when buying a house, closing costs can add up to a substantial amount of money for either party.
Buying a home may seem like a simple process, but in truth, it’s not as straightforward as it seems. There are many hidden fees when buying a home that you need to understand — and plan for — in order to manage your cash when the time comes to close on a home. Because each purchase is different from the other, the fees to expect when buying a home can be illusive.
By carefully examining the deal you’re negotiating, and other expenses like property taxes and prorated fees for recurring monthly expenses, you can arrive at a rather accurate total cost. Your mortgage broker can help build you an estimate.
So, what does it really cost to buy a home? Below, we’ll help you understand the factors that go into answering that complicated question. This way, you’ll be able to crunch the numbers before you buy. And you’ll have a better understanding of what costs are associated with buying a home.
What Do Closing Costs Include?
There are many costs involved in buying a home. What do closing costs cover? They pay for expenses when buying a home that are charged by a myriad of vendors, government entities and your lending institution — all of which played some key role in securing you your new home. Closing costs are payable with your down payment, but they are separate fees.
Sometimes your lender will get you a figure called “cash due at closing” which is the total amount you need to bring to the table at closing. Cash at closing usually includes both the remaining amount due for the down payment and the other moneys due, known as closing costs.
Although the following list of closing cost fees may not be exhaustive, several of the fees are dependent on factors like the type of property you’re buying. Other fees are based off of the location of the property. And some fees are related to your loan type and the amount borrowed:
Appraisal fee. This fee is charged by your home appraiser, who will do a thorough review of the prospective home’s relative value.
Attorney fees. Typically due at closing, this expense is likely a flat fee amounting to a few hundred dollars. Some states mandate that an attorney review and validate the process.
Closing fees. Also known as an escrow fee, this is the amount paid to those involved in closing the deal, such as the title company, the escrow company or any attorney involved in the closing. Acting as a neutral third party, the title company administrates the process. Attorneys are required to be present at closing to review paperwork and answer questions in some states.
Credit report fee. One of the first fees you’ll pay when applying for a home loan, this is usually a “pass through” fee that the credit bureaus charge the lender.
Discount points. Also known as a “rate buydown,” this optional fee will only occur when you make an agreement with a lender to purchase a reduced annual percentage rate (APR) for the loan. Pricing depends on the amount that the APR is reduced.
Real savings can be achieved, though these are best applied to mortgages where the purchaser plans on owning the property for at least seven years. One important note: discount points are tax deductible. At tax time, you may be able to write off the interest paid on your mortgage and deduct all the points paid on the mortgage as well. So a small investment at closing can save you thousands if you intend to stay in the home for several years.
Document preparation fee. These costs are sometimes charged by the lender to pay for preparing the loan paperwork and are typically negotiable.
Escrowed deposits for property taxes and mortgage insurance premiums. You may be responsible for paying two months of property taxes and mortgage insurance premiums at closing.
FHA up-front mortgage insurance premium. If you’re buying with an FHA loan, you’ll have to pay this fee — usually 1.75 percent of the loan amount. It can be included into the cost of the loan.
Flood determination fee. This important service is performed to verify you’re not purchasing property that resides within a flood plain, or ensure you’re aware of it if you are located within one. When it’s determined that your property is located within a flood zone, you’ll need to purchase flood insurance.
Home inspection. After the seller has agreed to your offer, you’ll hire a home inspector to review the various aspects of the home for issues, concerns and deal breakers.
Home warranty. Although not usually required by the lender, purchasing a home warranty can help you avoid costly out-of-pocket expenses. And sellers are offering this option to entice buyers to purchase, too. If a covered major appliance should need replacement, you’ll only have to pay the deductible. You may be able to request the seller purchase this for you. Another option is to pick up equipment breakdown coverage in addition to your homeowners policy.
Homeowner’s association (HOA) transfer fees. This seller-paid fee will be accompanied by paperwork from the HOA that identifies the current state of dues, paid or due immediately. Additionally, the buyer should review these files prior to close to understand HOA monthly fees, assessments, special financial concerns, notices and meeting minutes.
It’s also important to be aware of any legal actions made either by or against the HOA before you make an offer on a home. Included in this parcel of documents should be the HOA’s rules and regulations and by-laws.
Homeowners insurance. This is important coverage that’s key to protecting your home and will likely be required by your underwriter, depending on the loan. Your first year’s premium is typically due at closing.
Miscellaneous state and local fees. State tax stamps, certifications, and local municipal processing fees may not add up to much on their own but they are an expense.
Notary fee. In order to verify your and the seller’s identity, a notary may be required to stamp the documentation.
Owner’s title insurance policy. This is coverage that protects you if someone should challenge your ownership of the home after you buy. It’s typically required in the event there’s a lien or conflict on the home and is well worth the money if an issue arises.
Origination fee. This fee covers the costs that the lender incur to administrate the loan. Typically it equates to around half to one percent of the loan’s total. You may be able to have the fee waived, or seek out loans that doesn’t require this fee, so shop around before you commit to a lender.
Pest inspection. This fee is paid to a pest control specialist to assess your new purchase for signs of infestation.
Prepaid interest fee. Your lender will require that you pay out the interest on the first month’s mortgage.
Private mortgage insurance fee (PMI). This monthly PMI fee is paid until you’ve paid out at least 20 percent of the equity of your home’s value. Depending on your down payment, this fee can persist for years. You’ll have to pay the first month’s PMI at closing.
Property tax. Lenders will usually want taxes due now or up to 60 days from the purchase date to be paid at closing.
Real estate agent commission. As discussed above, this major expense for the seller but it’s folded into purchase price. When the seller’s profit margin in high enough, these costs are usually paid without any seller out-of-pocket cash concerns.
Recording fees. You’ll usually have to pay these because the buyer is forcing a legal ownership change in the deed to the property.
Settlement fee. This typically-negotiable fee is paid to the agent or escrow holder.
Survey fee. This cost is charged by a professional survey team to validate or update the property’s boundaries.
Title company title search fee. Also known as the exam fee, this is the amount paid to the title company for performing a search of property records. They research the deed to the home, helping to ensure that no other entities have a claim or lien against the property.
Title insurance and binder. These policies protect you and your mortgage lenders in the event that the current owner of the home doesn’t have a complete deed and/or authority to sell the property.
Title search. This fee is paid to perform a search in public records for data on the property.
Transfer taxes. This is a tax that’s paid when the title to the home is passed from the seller to the buyer.
Underwriting and origination fees. These charges are related with verifying, evaluating and processing the loan application.
Wire transfer fee. This fee is charged upon closing, and covers the cost of transferring the money from the lender to the seller’s bank to make the purchase.
VA funding fee. When you work with a VA loan, you may have to pay a VA funding fee. You may be able to add this to the cost of the loan, and some are exempt from this fee.
How Much Are Closing Costs on a House?
The average closing costs on a home purchase usually range from about 2-5 percent of the total sale price of their new home. This means that if you buy a $300,000 home, you can expect to pay anywhere from $6,000 to $15,000 in closing costs alone — in addition to the down payment. Note that you can seek out loan deals that have nominal or no closing fees, but you’ll likely wind up paying for these costs over the life of the loan.
It can be hard to pin down the true cost of buying a home. With typical closing costs accounting for such a large amount of money, some loan types allow you to pay for these fees by rolling the costs into the loan. Ask your mortgage broker if your loan allows this type of allowance to reduce the out-of-pocket expenses when buying a home. If you’re asking yourself “How much does it cost to buy a home?” you really need to factor these numbers in so that you’ll have an accurate picture of the total costs of buying a home.
When Are Closing Costs Due?
In general, closing costs are due on the day of closing, though your bank may require that some purchases and fees be paid independently of closing. As a rule, closing costs are payable at the time when the title of the property changes hands, or when it’s transferred from the seller to the buyer. This moment is also known as the close of escrow.
While you’re working out the finances on purchasing a home, remember to reach out to your American Family Insurance agent. Schedule an appointment to go over your coverage needs and build a policy that works for you. In addition to the comfort you’ll find in owning your home, you’ll also walk away with the knowledge that all your hard work is well-protected.