Wednesday, February 6, 2019 / by Holly Northup
When it comes to buying a home, most home buyers know all about the down payment and how much they will have to put down to qualify for particular loan options, whether that be a conventional, FHA or VA loan. What they aren't aware of is how much and what is included in the closing costs of purchasing a home. To prepare you for the final step of the home-buying process, below is a breakdown of the closing costs in a real estate transaction:
Let’s start at the beginning, what are closing costs? The closing costs are the final step in the home-buying process and are the lender and third-party fees for services used to complete the transaction. These costs can range from two to five percent of the purchase price of the home. For example, if you buy a $300,000 home the closing costs would range from $6,000 to $15,000. Where exactly does this money go?
The closing costs cover both recurring, ongoing expenses associated with your home, and non-recurring fees, one-time fees paid at the time of closing. Let's break down these expenses:
Recurring Closing Costs
First, you need to understand what an escrow account is – as that is where these recurring closing costs are going to go. An escrow account is created by your lender as a forced savings account for the future home ownership fees you will now pay. Paid to your lender at the same time as your monthly mortgage payment, this money will go directly into you're your escrow account to be used when these home ownership fees are due. What home ownership fees go into your escrow account? The most common are property taxes, homeowner’s insurance, prepaid home interest and title insurance. How much should you expect to pay to your escrow account to cover each of these fees? Let's break it down:
- Property Taxes – This value depends on when your home purchase was in comparison to the local tax billing cycle.
- Homeowner’s Insurance – The premium is usually due at closing, plus another two or three months’ worth of payments.
- Prepaid Loan Interest – A fee paid for the number of days you have the loan until the first payment is due.
- Title Insurance – A fee that protects you in case the seller doesn’t have full rights and warranties to the title of the property.
Non-Recurring Closing Costs
The non-recurring fees are costs you pay for the services of a lender and other professionals to complete the transaction of purchasing the property. These fees include the following: home inspection fees (if needed), discount points you are paying upfront, origination fee, document-prep fee, appraisal fee, survey fee, underwriting fee, credit report fee, title search and recording fees and a wire-transfer fee. Unsure of why all of these charges are needed? Here is a description of each of these non-recurring closing costs:
- Home Inspection – Inspection of the property to determine what, if any, repairs need to be completed.
- Points – Money paid upfront to lower your interest rate.
- Origination Fee – A fee charged by your lender to process the loan.
- Document-Prep Fee – A fee covering the cost of preparing your file for processing.
- Appraisal Fee – A fee covering the cost of a professional estimating the value of the property.
- Survey Fee – A fee covering the cost of verifying the home’s property lines.
- Underwriting Fee - A fee covering the cost of evaluating and verifying your loan application.
- Credit Report Fee – A fee for pulling your credit scores.
- Title Search – A fee covering the search for the property title.
- Wire-Transfer Fee – A fee associated with wiring funds from the lender to your escrow account.
When is the best time to consider the closing costs associated with the property? When you are shopping for a lender. At this time, you can discuss your loan and interest rate options as well as whether or not you would like to pay any discount points to lower your interest rate. After these values are determined, you can use a closing-cost calculator to determine what other costs you will encounter, plus your monthly mortgage payment (based on if you are financing the closing costs into your mortgage or you are going to pay them up front).
Do you have any questions about the closing costs? We are here to help you; contact us anytime.