Closing Cost Basics
If you have ever purchased a home, you know how lengthy the list of closing costs can be. If this is your first-time purchase, you may have heard some horror stories about attorney fees, escrow fees, homeowners insurance, loan-origination fees, mailing fees, notary fees, prepaid loan interest, property inspections, recording fees, title insurance, agent commissions, and the notorious "miscellaneous fees." Here are some basics to help you get prepared for and better understand the costs involved in a home purchase or refinance. The most important thing to remember when it comes to closing costs is to budget for them.
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Closing costs are typically between 2% and 5% of the home's purchase price. Another important note is that these costs are completely separate from the amount of money that you are using as a down payment. Don't assume that your 20% down payment will cover the closing costs. If you spend 100% of your cash on the 20% down payment you will have to finance the closing costs. Major closing costs include:
- Loan origination fees - lenders do a lot of work to make sure you can borrow and payback the loan.
- Escrow fees – the fees are levied to prepare all the documents along with the transfer of funds.
- Private mortgage insurance - this is reserved for those who make a down payment of less than 20% of the purchase price. Lenders will require that you take out insurance to protect them in the event that you default on your mortgage. Usually you pay one year's premium cost at closing.
- Homeowners insurance - one year's premium cost at closing.
- Title insurance – an insurance protecting both parties if the seller does not actually have legal right to sell the property.
- Property taxes- paying the seller for any prepaid taxes, prorated for the year.
While this list is not comprehensive, we want you to be aware that you should expect and budget for closing costs. However, not every lender is created equal. Inquire about the prospective lender's closing costs and remember that lenders are required by law to give you a good faith estimate. A good faith estimate from your lender will give you the best idea of the fees they plan on charging you.