November 15, 2021
5 MINUTE READ
You’ve saved up for your down payment and found the home that you want. But before you start making offers, you also need to consider your closing costs. Whether you are buying a new home or simply refinancing your existing mortgage loan, it is important to factor in closing costs.
Understanding what closing costs are and what they cover, as well as how you should budget for them, can help to make the final phase of the home buying process smoother. With this in mind, let’s take a look at what closing costs are, and what you can expect.
Closing costs are the expenses that you are responsible for paying when you close on the purchase of a home or other type of property. These are all the required fees that come along with purchasing a home, including application fees, title insurance, processing fees, homeowners insurance, attorney’s fees, any mortgage discount points (if applicable), and more. These costs are typically paid before signing the final documents in the transaction.
Although these are called closing costs, you may be asked to pay for them as certain actions take place. For instance, you may be expected to pay for the appraisal or the home inspection at the time of service.
Of course, there are always exceptions to the rule and your transaction may look different from your friends or family members, but in general, there are five types of closing costs and fees that you can expect to see.
Title fees (or attorney fees).
These fees are to make sure that the seller of the property can transfer the title or deed of the property to the buyer without also passing along any issues or liens that may be attached to the property. These fees include the cost to record and register homeownership at the courthouse after the closing, as well as the cost to pay the notary who witnesses the signing of closing documents. If you are using an attorney to help with your closing, their fees are included here as well.
Property taxes and homeowners insurance.
Your closing costs will also include prorated property taxes and homeowners insurance premiums, in order to make sure that there are no gaps or lapses between when the seller stops paying and the buyer takes over payments. Since you are paying for these before you start making your regular mortgage payment, these fees are often referred to as “prepaids.” This fee can also include a pre-paid interest payment to cover the gap between when you close and when you make your first mortgage payment.
Keep in mind that if you plan to include these fees in your monthly mortgage payment (also known as an escrow account), which allows your lender to make these payments on your behalf, you will need to make sure your escrow account has the funds to cover any payments that must be made shortly after closing.
If your mortgage loan requires a type of funding or guarantee (most often with a government-backed loan), you may be required to pay the total amount due up front. Loans that require a smaller down payment are, understandably, riskier long-term for the lender; mortgage insurance protects the lender in case you have to go into foreclosure. Although all of these fees are typically rolled into the amount that you are borrowing, they will be listed and itemized separately on your closing disclosure that you’ll receive before closing.
Lender fees, or loan-related fees, include a number of fees relating to your transaction, such as any origination charges, processing fee, application fee, credit report fee, and any discount points you may choose to purchase in order to lower your interest rate. Some lenders include additional fees in this category, such as wire transfer fees, underwriting fees, termite inspection fees, and the home appraisal.
These fees are sometimes included with lender fees, so just check your closing disclosure. The property will be appraised during the loan process, and will likely also undergo other inspections to rule out any issues involving pests, or other structural, plumbing or electrical issues. Survey fees may also be included in this category, if it was necessary to determine property lines. There are also fees to evaluate your property on the need for flood insurance, as required by FEMA and most lenders.
These fees may also be listed as loan fees or lender fees. There may even be miscellaneous closing costs that don’t fit neatly into one of these categories. However, everything should be itemized and outlined in detail — and you can always ask if you have questions about something.
In the first half of 2021, the national average in closing costs for single-family homes was up more than 12 percent year over year, including taxes. With this in mind, it’s more important than ever to understand how you should budget for your closing costs. On average, closing costs for the buyer run between two and five percent of the total loan amount. In other words, on a $600,000 home purchase, you will likely pay between $12,000 and $30,000 in closing costs.
When buying a home, you have the option of paying your closing costs as a one-time, out-of-pocket expense. However, during a refinance you may be able to roll it into the amount financed. Keep in mind, however, that you’ll pay interest on these closing costs over the lifetime of your mortgage loan, if you choose to go this route.