If you’re in the market to buy a home, we imagine that you’ve been saving diligently. Yes, you’re borrowing the money to pay for the house, but that doesn’t mean you won’t have to pony up a substantial amount of cash throughout the mortgage process.
And, while you already know you need a chunk of change for the down payment, there are a variety of small fees for which you’ll also be responsible. They generally account for 2%-5% of your purchase price. All of these fees fall under the umbrella of closing costs, and it’s important to factor them into your home-buying plan.
The average American pays $5,779 in fees at closing, including taxes. So let’s remove the element of surprise and give you the upper hand by going over these sneaky little fellas now.
Closing costs — gotta catch ’em all
By law, your lender must provide you with a loan estimate within three days of receiving your application. This estimate will include an overview of the amount of closing costs. Then, three days before your closing, you will receive a closing disclosure that will provide all the little details about your loan and the exact breakdown of closing costs.
We can effectively divide all closing costs into three categories:
- Lender fees. Your lender may charge one overarching origination fee, or they may break down the cost into smaller fees. Some of these could be:
- Courier fees: charged to expeditiously courier signed paper documents
- Appraisal costs: paid to an appraisal company to confirm the market value of the home you’re purchasing
- Administrative fees: the cost for the lender to manually process your loan
- Underwriting fee: the cost for the lender to research whether or not to approve your loan
- Credit check: a fee charged by some lenders to pull your credit
- Title fees. The majority of your closing costs will be title-related. Some of these will include:
- Title search: paid to the title company for their research of the deed on your new property, ensuring no one else has a claim to it
- Title insurance: required by the lender to protect against potential disputes when property ownership is transferred
- Settlement services: the fee associated with the title company’s administrative cost. This typically covers all the necessary steps to close the transaction and coordinate pertinent documents for public recordation (yes, that’s exactly what it sounds like – documenting an instrument, such as a deed or mortgage, in a public registry)
- Transfer tax (aka mortgage recording tax): a tax paid when a title is transferred from one owner to another; not mandatory in all states
- Prepaid costs. These advance payments of associated yearly fees are required by lenders, and can include:
- Homeowners insurance: covers your home against possible damages; the first year’s premium is generally paid at closing
- Property taxes: yearly taxes due within 60 days of closing
- Per diem interest: covers any interest due for the days between the disbursement of your loan and the arrival of your first mortgage statement
Refinancing — closing costs round two
Refinancing can definitely save you money in the long run, but remember: you’ll have to pay closing costs a second time. The costs you’ll pay will be largely similar to the first time around, but you may see some savings. You may be able to waive appraisal fees and application fees, and it never hurts to engage in negotiations. You could even be due an escrow refund if you switched lenders during the refinance. Knowing is half the battle, so enter your refinance confidently and with no surprises when it comes to closing time.
The amount may vary, but you should be prepared to spend up to 5% of the home’s purchase price on closing costs, in addition to your down payment. And hey – maybe consider having one less drink at happy hour, because you can never have too much in savings when it comes to getting into your dream house!