If you are wondering about closing costs chances are you’re pretty far down the road in the home buying process. Maybe you have an agent maybe you don’t. If you don’t, make sure to choose someone with experience. Part of their job is to negotiate things like closing costs.
Closings costs are the fees and services needed to complete the home buying transaction. If you have ever bought a car you know that you don’t just hand over the cash and drive off free and clear. There is paper work to be done, taxes to be paid, and various government requirements. A home purchase is like buying a car times 50.
Besides the cost of the home itself there are other services and requirements that keep both parties, and the lender, safe from fraud as well as ensuring everyone does what they promised.
Buying a home and lending money for that home comes with some amount of risk. So, a large part of closing cost fees are to insure a safe and fair transaction.
Closing costs range in price from 1.5-5% of the loan amount. The percentage you pay within that 1.5-5% range depends on the loan amount, mortgage type, the home price, and area of the country in which you are buying. You’ll have to pay some of the same fees when you refinance as well
Keep in mind that higher priced homes will be charged a smaller percentage for closing costs. For example, a $300,000 home might be in the 3-5% range while a $900,000 home will more than likely be in the 1.5-2.5% range.
Depending on the price of your home closing costs can be a considerable chunk of change so lets break down what actually goes into closing costs and how you can finance them.
Closing costs can be broken down into two groups, recurring and non-recurring fees.
Recurring fees are those expenses which you will continue to pay as a home owner with a portion of that due at closing. Non-recurring fees are a one time cost
Property Taxes– most counties assess property taxes once a year and are due annually on a specific date . Real estate transactions rarely close on that date. To accommodate the time gap most transactions will include an adjustment to assure that both the seller and the buyer, pay their share of the annual property tax.
Homeowners Insurance– lenders require any home to covered at all times by homeowners insurance. Typically, the amount collected is a one year premium due at loan closing. Again, the amount will vary depending on the value of the home being purchased.
Interest on the Mortgage– Mortgage payment are due on a specific day once a month. If the closing does not fall on that date, then an adjustment must be made to calculate the interest on the loan for the number of extra days until the first payment is due.
Homeowner Association Dues– HOA fees are pro-rated and will be paid by both the buyer and seller for the time they occupy the house.
are one-time fees associated with borrowing money and the services that were required to purchase the property Any home inspection fees.
Any discount points you’re paying upfront to lower your interest rate.
Origination Fee– This fee is one way a mortgage lender can make money on providing you a loan. The price of this fee can vary because lenders may choose to charge more in other areas. For example you might have no origination fee but give you a higher rate.
Appraisal Fee– A lender will order an appraisal to ensure that the loan amount is not for more than the value of the home.
Underwriting Fee– for the cost of evaluating and verifying your loan application.
Credit Report Fee– for pulling your credit scores.
Title Search and Recording Fees– This fee is determined by the county in which the property is located. Every time a home is bought and sold, the county records the details of the transaction and the new owner’s information for tax purposes. The process of recording also solidifies your legal ownership of the property
Wire Transfer Fee- for wiring funds from the lender to your escrow account.
Title Insurance– This is a cost placed into escrow, which is considered a must because it protects you in case the seller doesn’t have full rights and warranties to the title of the property.
Over the long run you will save more money by paying for closings costs as a one time, out of pocket expense. However, you can work with your loan provider to roll closing costs into the overall cost of the mortgage. The down side to this is that you will have to pay interest on your closing costs.