Are you interested in buying a home, but curious about the cash needed to make it happen?
Once you’ve made an offer on a home and it’s been accepted, you’ll have to put down a deposit (earnest money), which is typically 1-3% of the agreed upon selling price. This money shows that you’re serious about the offer and will eventually go towards your down payment once the loan is approved. Also, you’ll have to pay for a home inspection, a home appraisal (necessary for obtaining a loan; not necessary if it’s a cash deal) and property insurance must be acquired.
In addition to these fees, you should have an idea of what the closing costs will look like once when the keys to your new home are turned over to you.
“Closing day is often the most anticipated part of the home buying process,” says Jake Upwell, broker associate at Usaj Realty. “To get there, you’ve toured countless homes, negotiated a winning offer, gone through inspections, and undoubtedly run into some surprises along the way. But, before you get to the closing table, there’s one more piece of the puzzle to understand: closing costs.
“Closing costs are intimidating to buyers because they are a series of fees disguised in ‘real estate lingo’ that’s tricky to understand and add up to a significant amount. Trust me, we get it — buying a house is expensive and additional cash needed at the last minute isn’t easy to come by. That’s why it’s important to understand all these terms and how much it’s going to cost you at the closing table.”
We sat down with Stephanie Bohr from Spire Financial to help us break down what to expect for closing costs. Here’s what we learned:
What Are Closing Costs?
Closing costs are fees associated with buying a home. They include a range of items (see our list below) and vary by state, the lender you choose to work with and your loan type. You have to pay closing costs with both a home purchase as well as a refinance. Remember, these are separate fees outside of your down payment.
What Are Typical Closing Costs?
Closing costs typically range from 1.5–3% of the home’s purchase price. For instance, if you buy a $500,000 house, your closing costs could range from $7,500 to $15,000. Closing fees vary depending on your state, loan type and lender, so it’s important to pay close attention to these fees.
A lender is required by law to provide you with a loan estimate within three business days after receiving your mortgage application.
Three business days prior to your closing, a lender must provide you with a closing disclosure form.
Closing costs typically range from 1.5–3% of the home’s purchase price.
How Can the Closing Costs Payment be Made?
If you don’t want to pay interest on these fees, paying the closing costs in one lump sum is the most economical way to go. However, if you don’t have the cash on hand, speak with your lender about potentially rolling the money into your loan.
What Fees Are Included in Closing Costs?
Closing Fee
Also known as an escrow fee, this is paid to the party who handles the closing, which could be the title company, an escrow company, or an attorney, depending on state law.
Credit Report Fee
This is a charge ($15–$30) from a lender to pull your credit report from the three main reporting bureaus. Some lenders might not charge this fee because they get a discount from the reporting agencies.
Escrow Deposit
Some lenders require you to deposit two months of property tax and mortgage insurance payments at closing into an escrow account.
Homeowners Association Transfer Fee
If you buy a condominium, townhouse, or property in a planned development, you must join that community’s homeowners’ association (HOA). This is the transfer fee that covers the costs of switching ownership, such as document costs. Whether the seller or buyer pays the fee may or may not be in the contract; you should check in advance.
Homeowners Insurance
A lender usually requires prepayment of the first year’s homeowners insurance premium at closing.
Lender’s Title Insurance
This is an upfront, one-time fee paid to the title company that protects a lender if an ownership dispute or lien arises that was not found in the title search.
Points
Points (or discount points) refer to an optional, upfront payment to the lender to reduce the interest rate on your loan and thereby lower your monthly payment. One point equals 1% of the loan amount.
Owner’s Title Insurance
A title insurance policy protects you in the event someone challenges your ownership of the home. It is usually optional but highly recommended by legal experts. It usually costs 0.5–1% of the purchase price.
Origination Fee
The origination charge covers the lender’s administrative costs to process your loan. Some lenders do not charge origination fees, but if they don’t, they usually charge a higher interest rate to cover costs.
Prepaid Daily Interest Charges
A payment to cover any pro-rata interest on your mortgage that will accrue from the date of closing until the date of your first mortgage payment.
Property Appraisal Fee
This is a required fee paid to a professional home appraisal company to assess the home’s fair market value used to determine the Loan-to-Value Ratio.
Property Tax
At closing, expect to pay any pro-rata property taxes that are due from the date of closing to the end of the tax year.
Real Estate Commissions
Buyers typically don’t pay this fee; the seller does. The commission charged by the seller’s broker is often 5–6% of the home’s gross purchase price, which is then split between the seller’s agent and the buyer’s agent.
Recording Fee
A recording fee may be charged by your local recording office (usually a city or county clerk’s office) for the official processing of public records.
Title Search Fee
This is a fee charged by the title company to analyze public property records for any ownership discrepancies. The title company searches deed records and ensure that no outstanding ownership disputes or liens exist on the property.
Transfer Tax
A transfer tax may be levied, depending on the jurisdiction, when the title is handed over from the seller to the buyer. The cost varies geographically.
Underwriting Fee
Underwriting fee charged by the lender for the work that goes into evaluating your application and approving your loan. Underwriting is the research process of verifying your financial, income, employment and credit information for final loan approval.
Conclusion
Once you determine the type of home you’d like to purchase and the price point, your mortgage lender can walk you through what to expect to have to pay at closing and help you determine how best to pay for it. Be direct and don’t be afraid to ask for a full breakdown. Don’t get discouraged if now is not the right time to buy; instead, set up a plan to save for the future.