Closing Costs: What You Need To Know
When it comes to saving money to buy or refinance a home, you’ve probably been pretty focused on the down payment. But you’ll also need to plan for closing costs, which are due on closing day.
What Are Closing Costs?
Closing costs are fees paid to cover the property, insurance and mortgage costs incurred by your lender while processing your loan, like home appraisal and title insurance costs.
Lenders are required by law to provide a Loan Estimate within 3 business days of receiving your application. The estimate provides a detailed list of what you can expect in closing costs. This document is a TILA-required lender disclosure that provides a good-faith estimate of the cost of the loan.
Additionally, you’ll receive a Closing Disclosure 3 business days before you close, which will provide you with the actual costs of the mortgage and give you time to question any discrepancies before closing.
How Much Are Closing Costs?
The list of closing costs paid by the buyer is certainly longer, but the seller usually pays the real estate agent’s commission, which is typically at least 6% of the purchase price. So, in most cases, sellers pay as much and maybe more than buyers. Closing costs are paid in cash at the time of closing.
You’ll pay higher closing costs if you choose to buy discount points and – also referred to as prepaid interest points or mortgage points, but the trade-off is a lower interest rate on your loan.
What Do Closing Costs Include For The Buyer?
The closing costs you’ll pay will vary depending on where you’re buying your home, the home itself and the type of loan you pursue.
Closing costs may include appraisal fees, loan origination fees, discount points, title searches, credit report charges and more. Here’s a breakdown of common closing costs.
- Appraisal: An appraisal will be mandated by the lender to make sure the home is worth the sale price. Most appraisers charge $300 – $500 for their services.
- Escrow fees: You may have to pay portions of property taxes and insurance upfront into an escrow
- Flood certification: If your house is situated on or near a flood plain, your lender may require documentation confirming the need for flood insurance, which involves paying around $15 – $20 for a certification from the Federal Emergency Management Agency (FEMA).
- Property taxes: At closing, the buyer typically pays the city and county property taxes due from the date of closing through the end of the tax year.
- Annual assessments: If you’re buying in a development with a homeowners association (HOA) that requires an annual fee, it may be due upfront at closing.
- Survey fees: If a survey has to be done to determine your property lines and the exact dimensions of your land, you’ll pay the fee for the service at closing. The cost could run as high as $800, but it heavily depends on the complexity of the survey job.
- Title/attorney fees: This includes necessary government filing fees, escrow fees, notary fees and other expenses related to transferring the deed. The cost of title and attorney fees varies significantly from state to state.
- Loan interest: You’ll need to pay interest on the loan prorated from the closing date to the first of the following month.
- Lender fees: These cover items ranging from administrative costs to pulling your credit report to wire transfer fees. If a lender boasts unusually low rates, it’s possible they’ll try to make up the difference with additional lender fees, so be sure to compare apples to apples. What one lender calls an origination fee may be separated into a processing and an underwriting fee by another lender.
- Application fee: This is charged by the lender and varies in price, up to $500. The application fee is nonrefundable, even if you aren’t approved for the loan.
- Assumption fee: If you’re assuming a conventional loan from the seller, you’ll pay an assumption fee set by the lender, typically $800 – $1,000, or in some cases 1% of the loan amount. For FHA loans, the maximum allowed is $900, and for VA loans, the max is $300.
- Prepaid interest: This is daily interest that accrues on the loan between the closing date and first monthly mortgage payment.
- Loan origination fee: These are the fees paid to the lender to obtain a mortgage and are expressed as a percentage of the loan amount. If the loan amount is $100,000 and you see a $1,000 loan origination fee on the paperwork, the lender is charging one mortgage point.
- Discount points: Discount points are fees paid directly to the lender by the buyer at closing in exchange for a reduced interest rate. This is also called “buying down the rate.” One point costs 1% of your mortgage amount (or $1,000 for every $100,000).
- Title search fee: Paid to the title search company that researched the property’s history to make sure the title (ownership) will be “” Typically, this runs $75 – $100.
Other Insurance-Related Costs
- Homeowners insurance: Your lender might require you to prepay a year of homeowners insurance upfront. Homeowners insurance costs are prorated for the remainder of the year in which you bought the home. According to the National Association of Insurance Commissioners (NAIC), the average cost of homeowners insurance in 2017 for the most common type of home insurance was $1,211. In 2018, those premiums increased another 3.3%.
- Mortgage insurance application fee: If your down payment is less than 20%, the lender will require private mortgage insurance (PMI). This fee varies by lender.
- Upfront mortgage insurance: PMI can be rolled into your monthly payments, but it can also be paid at closing. Paying upfront usually saves money.
- FHA, VA and USDA fees: Fees on FHA, VA and USDA loans differ from those charged on conventional loans. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% and a monthly fee. VA home loans require an upfront, one-time VA funding fee, determined by the loan amount, the buyer’s service history and other factors. VA home loan applicants can pay all or part of the fee in cash or roll it into the loan amount to reduce out-of-pocket expenses.
- Lender and owner title insurance: Lender policies protect the mortgage lender’s interest. Buyer policies protect the buyer’s interest. The average title insurance policy carries a one-time premium of about $1,000, paid by the buyer.
What Do Closing Costs Include For The Seller?
As we mentioned, the list is short but mighty: the real estate agent’s commission. When you sign with a listing agent, they should disclose their commission, but sellers are responsible for paying the buyer’s agent as per their agreement as well. Because it’s generally paid out of the sales proceeds, it tends to be less painful for sellers than buyers to settle up at closing.
Help With Closing Costs
There are lots of first-time home buyer assistance programs out there that provide help with down payment and closing costs.
For example, Fannie Mae’s HomePath Ready Buyer Program gives first-time home buyers the opportunity to earn a credit worth 3% of a home’s purchase price if they complete a home buyer education course and buy a HomeReady home.
If you need help with closing costs, check with your state or local housing agencies to find out what may be available. HUD maintains a list of programs organized by state. Many offer low-interest loan programs or grants for first-time buyers.
Another option is to take lender credits where you take a slightly higher interest rate in order to pay off the costs over the life of the loan rather than upfront.
The Bottom Line: Closing Costs Are A Big Part Of Your Home Buying Expense
When you’re planning on buying or selling a home, you need to figure that you’ll be paying a substantial amount in closing costs. For sellers, the costs come out of the sales proceeds, but buyers must pay their closing costs upfront and in cash. Learn more about the steps to buying a home.
If you’re ready to get started, you can apply online or give us a call at (888) 452-0335.