Published in: Mortgages | April 19, 2019
What Closing Costs Will You Pay?
By: Christy Bieber
Closing costs can be very expensive when buying your home. Here’s what you need to know about the closing costs you're likely to pay.
Image source: Getty Images.
When you buy a home, the cost of the house isn't the only thing you need to pay for. There are a host of other expenses you'll incur, from inspection fees to make sure the house is structurally sound, to fees for your loan, to costs associated with transferring the property.
Many of the costs you incur as part of the home purchase are paid when you go to a lawyer's office or a title office and complete the transaction that transfers ownership. These costs are called closing costs and Zillow estimates these fees can add up to around 2%-5% of the home's value.
You'll generally need to pay these closing costs out of your savings when you close on your loan. In some cases, it's possible to borrow to cover some or all of your closing costs, but this is usually a bad idea because then you pay interest over decades on closing expenses. Trying to finance closing costs could also affect your loan-to-value ratio.
If you're wondering why closing costs are so expensive or what exactly all these costs are, read on to find out some of the costs that you can expect to incur. While you won't necessarily have to pay all of these costs for every transaction, if you're buying real estate, it's inevitable you'll incur at least some of them.
Fees need to be paid to whomever administers your closing and facilitates the completion of the transaction. In some states, a title office can handle the closing process. In others, you'll need an attorney to close on your loan. Either way, you're going to pay fees to someone who has the authority in your state to finalize the transfer of the real estate you're buying.
Even if you don't need a lawyer to close on your home purchase, you may still have to pay for an attorney. You could incur fees if you have a lawyer review the purchase agreement, if you need advice from a legal professional on how to structure the ownership of your home, or if you need legal advice on any of the other issues associated with the purchase.
Loan application and origination fees
Some, but not all, mortgage lenders will charge you a fee to apply for your loan or to originate the loan. Fees can vary by lender, and you may be able to negotiate them if you're a strong buyer. The fees you pay to your lender to apply or for your lender to originate a loan can include the costs of obtaining your credit score, while other lenders will charge you a separate fee for that.
Lenders go through an underwriting process, which involves investigating your financial situation to determine the risk that you'll default on your loan. Many lenders charge you underwriting fees to compensate for time and money spent on this process.
Mortgage discount points
Some, but not all, borrowers will pay points when they obtain a mortgage. Points are essentially prepaid interest. You pay upfront to buy down the interest rate on your loan so you can pay less in interest over time.
Points typically cost 1% of the loan amount. On a $100,000 loan, buying a point would cost you $1,000. Points reduce your rate by an amount determined by your lender. It's common for points to reduce your rate by 0.25%. So, your loan might go from 4.5% interest to 4.25% interest in exchange for paying a point.
You'll have to pay points at closing if you decide to buy them, but the cost is usually tax deductible. The longer you stay in your home, the more sense it makes to buy points. You should do the math to find out if buying points is worth it by dividing the initial cost of the point by the monthly savings you receive because of it.
If a point costs you $1,000 and reduces your monthly mortgage payment by $15, it would take you 67 months to break even ($1,000 /15). If you don't plan to stay in your home for that long, buying a point isn't worth it. If you plan to stay longer, it makes sense because you'll continue to enjoy lower payments even after saving enough to make up for your initial investment.
Credit report costs
If the cost of obtaining your credit report isn't included in the loan application or origination fees, you'll need to pay for this separately. You'll pay for the cost of obtaining a credit report for each of the co-applicants for the loan.
Lenders require you to have the home you wish to buy appraised. An appraisal involves a professional taking a close look at your home's features and comparable sales in order to estimate what the market value of your home is.
You need an appraisal so a lender can determine how much money to lend you. No lender wants to lend you more than the home is worth because this creates too big of a risk. The home is meant to serve as collateral and to secure the loan. If the lender couldn't resell the home to cover losses in the event you weren't able to pay back what you owe, the lender would lose money.
When the appraiser determines what the home is worth, your lender will lend you a certain percentage of its market value. Typically, lenders like to cap the amount they'll lend you at 80% of the home's value. This would mean you have an 80% loan-to-value ratio, and you'd need to put down a 20% down payment. However, you can get FHA loans with a low down payment or VA loans with no down payment. Some conventional lenders also offer loans with as little as 3% down for qualified borrowers.
If you put down less than 20% of the appraised value of your home, you'll generally need to pay private mortgage insurance (PMI) to protect the lender.
Appraisals can cost several hundred dollars, but you won't be able to get a loan without paying for one.
Mortgage lenders also want to make sure the home you're buying has no major problems. As a result, you're typically required to pay for a home inspection to check out the house. This can also cost several hundred dollars.
In addition to a basic home inspection, you may also need to pay for additional specialized investigations into the home. For example, you may choose to obtain -- or be required by your lender to obtain -- an inspection aimed at determining if there's any lead-based paint in the home or an inspection to determine if there are any pests in the home.
Your lender will generally require you to have a survey done of the property. The purpose is to determine where the property's boundary lines are. If there's a dispute over where the property ends or if your neighbors have encroached upon the property -- say by building a driveway that's a little bit on your land -- the survey will reveal the issue so it can be addressed before closing.
Flood determination fees
In many cases, you're required to pay a fee to find out if the home you're buying is located within a flood zone. If it's determined your home is prone to flooding, your lender will require you to buy flood insurance before you can close on the home.
Deposits into an escrow account
In many cases, when you borrow to buy a home, the mortgage company collects more money each month than is necessary to make your loan payment. The mortgage company also collects money for your property taxes, private mortgage insurance, and homeowner's insurance. Money for insurance and property taxes is then put into an escrow account where it's held until your taxes or insurance premiums must be paid.
When you buy a home, you'll likely need to prepay the cost of insurance and taxes for several months. You'll need to bring this money to closing so it can be deposited into your escrow account.
If the seller paid property taxes for the entire year, you may need to pay back a prorated amount of these taxes depending upon when in the year you purchase the home. If any taxes are due within 60 days of closing, you'll generally be required to have funds for those at closing as well.
You'll be required to pay homeowner's insurance before closing on your home. Your lender wants to make sure the property is covered right away. You may also be required to pay for flood insurance if your home is found to be in a flood zone.
You'll pay premiums to buy your policy as part of closing costs. These premiums may be paid directly to the insurance company or be put into escrow, depending how your mortgage loan is structured.
Private mortgage insurance
When you put down less than 20%, you'll have to pay PMI. Chances are good you'll be required to pay at least a month or two of PMI premiums up front at the time of closing. This money could be paid into your escrow account or directly to the insurer, depending how your loan is set up.
Lenders also require you buy a title insurance policy when you buy a home. The title to your property determines the rights you have with regards to the property. A title search is performed when you buy a home to see if there are any claims on the property you weren't aware of. This search is supposed to find things such as easements that give someone else an ownership interest, or liens on the property giving someone else a legal claim.
If something is missed during the title search, it could cost you a fortune to fix the problem. That's because you can't buy more rights to the house than the seller has. The easement or lien won't disappear when you purchase the house, and you could be unable to use your property as intended or have to pay someone else's debt for the lien to be lifted. If the person who sold you the property wasn't actually the legal owner, you may not even own the property at all.
Title insurance protects you in case something is missed. The insurer would have to pay any expenses associated with fixing problems with the title.
Title search costs
You'll not only need to pay for title insurance at closing, but will also need to pay the company that performed the title search. Attorneys or title companies conduct title searches, depending on where you live.
Homeowner's association fees
Sellers generally pay a transfer fee to their homeowner's association, which pays for the creation of a report showing dues are current. New home buyers may also have to prepay some HOA fees when closing on a home. These fees can sometimes be collected as part of escrow, or could be paid directly to the HOA.
Special fees for government-backed loans
The U.S. government makes it easier for people to get mortgages by guaranteeing certain loans. The Federal Housing Administration (FHA) guarantees loans, as does the Veteran's Administration. FHA Loans and VA loans can be easier to qualify for than conventional loans because the government insures the lender against loss.
But, FHA and VA loans come with up-front fees. There's a VA funding fee to pay unless you fall within an exception, with the fee based on your down payment and whether you were in the regular military or the reserves or national guard. If you've obtained a FHA loan, on the other hand, you'll pay an Up-Front Mortgage Insurance Premium (UPMIP) equal to 1.75% of the loan amount.
While these fees can be financed as part of your loan, this again means paying interest on them for many years. Try to pay them up front if you can.
When you've purchased a property, a new deed will need to be recorded. Your city or county maintain deeds and public land records, so this money will be paid at closing and go to the local recording office.
Your county will likely charge a transfer tax when the property is sold and transferred to a new owner. Transfer taxes vary depending where you live.
Courier fees are fees paid for documents associated with your loan to be transported to appropriate parties. This could cover costs for transmitting documents to lenders, or to the county where the deed needs to be recorded.
Be prepared for closing costs
There are a lot of closing costs you have to pay when you buy a home. With so many different fees and expenses, it's no wonder closing costs could add up to as much as 5% of the amount you're borrowing. You need to save money to cover these costs before you start shopping for a home so you aren't hit with unexpected expenses you can't afford to pay after finding a home you've fallen in love with.
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