What are Closing Costs?
When you're starting your path towards buying a home, "closing costs" is a phrase you often hear. Maybe it was from a friend or family member who just bought a home. Or maybe it was from a TV show where they talked about asking the seller to pay closing costs. But what are closing costs, and how do they fit into the larger process of purchasing a home?
The term "closing costs" encompasses a variety of expenses and fees related to finalizing the sale of a home. This includes mortgage-related expenses, insurance, legal fees, taxes, and title fees. That's a lot, so I'll explain each category first, then have an estimator at the end. (Yes, that's a handy link in case you want to skip straight to the numbers)
Note, this does NOT include your inspection, any additional specialists, down payment, due diligence fee, or earnest money. If you want an approach that includes those elements, check out my articles on Cash to Close and How Much Should I Save to Buy a House.
Closing Costs Overview
Here are the categories we'll use to break down everything that goes into closing costs.
Loan Costs - Closing costs associated with the loan and lender
Legal Costs - Legal fees, taxes, and costs associated with recording
Taxes and Government Fees - Recording fees and pro-rated property taxes
Insurance - Pre-paid and escrow insurance payments
Other Costs - Odds and ends that don't fit into the above categories (helpful, right?)
This first group is directly associated with the loan itself. Many of these depend on the lender you use for your mortgage loan. I've seen some lenders require each of these, others don't. Your mortgage broker will have more information on what to expect here.
Origination Fee. This is the administrative fee the lender charges in order to process your mortgage loan. It typically runs around 1.0% of your overall mortgage amount.
Application Fee. The administrative fee associated with you applying for a mortgage.
Mortgage Points. These are typically optional, and will reduce the overall interest percentage on your mortgage. You're paying up front to lower your interest rate. Your loan officer will be able to better advise you on these.
This next group of Loan Costs are third-party services required by your lender in order to secure your loan.
Appraisal Fee. Your lender wants to make sure the home is worth the amount they're lending you. They do this by hiring a third party appraiser that charge you for.
Condo Questionnaire. If you're purchasing a condo, your lender may require this. It's some additional paperwork they send to the condo association to make sure it's well-managed.
Credit report. The lending bank will need to run a credit report during the underwriting process.
Flood Determination Fee. In North Carolina, even if you're not on the coast, you may be at risk. The lender passes on the cost of determining the property's flood risk.
Life of Loan Tax Service. Most lenders will handle the taxes along with your monthly mortgage payment. This is an up-front fee for that service.
Pre-paid Interest. Since you will likely close on the purchase in the middle of the month, this covers interest between the closing date and the end of the month. Then it will appear on your monthly mortgage statement.
Lenders Title Policy. This is a legal type of insurance that protects the lender in case someone else makes a claim to the property. You can (and should) have your own title insurance policy, which I've included under Other Costs.
Settlement or Closing Fee. This is what most people think of as your real estate attorney fee.
Recording Service. Your closing attorney will likely charge a small fee to record the final documents. This might be included in the Closing Fee (above).
Title Search Fee. Your closing attorney will conduct a full ownership search on the property. This is to make sure the sellers are legally capable of selling the property. This also might be included in your Closing Fee (above).
Taxes and Government Fees
Recording Fees. Both your deed and mortgage will be recorded and become public record (not the whole mortgage document, just your name, the bank's name, and the amount).
Property Taxes. Explaining property taxes is a whole article themselves. When you close on a home, you will have to either pre-pay the taxes, or make a payment in escrow. Either way, they'll be a part of your closing costs.
There are a couple of insurance types that can either be pre-paid or held in escrow (held aside). The following two items vary based on your insurance policy, credit score, and a myriad of other things.
Pre-paid and/or Escrow Homeowners Insurance. This is pre-payment or escrow on your homeowner insurance policy, in case something happens to your home. Your insurance company will have more information on how this will impact your closing costs.
Pre-paid and/or Escrow Mortgage Insuance. If you bring less than 20% as a down payment, you'll probably have mortgage insurance. This is pre-payment or escrow for that mortgage insurance. Your loan officer will be able to answer loan-specific questions on how this affects closing costs.
Home Inspection. This is generally paid up front. However, some home inspectors allow their fee to be paid from closing costs. ALWAYS have a home inspection, even if it's new construction.
HOA Dues. If your new home is part of a Homeowner's Association, your pro-rated dues for the current month will appear here. If dues are paid on a different schedule, they may require several months of dues as part of your closing costs.
Owner's Title Insurance Policy. This is the insurance policy that protects you if someone else tries to claim ownership.
Summing it All Up
Now you're armed with knowledge on many of the items that make up "closing costs." Some of them are fixed, others vary based on your mortgage, home purchase, and credit score. There's a lot that goes into it.
Now that we're through the definitions, here are some ranges to help you budget. These are not concrete numbers, but hopefully they'll shed some light for you.
List of Common Closing Costs
Origination Fee - Approx. 1% of your mortgage amount
Application Fee - $200
Mortgage Points - 0.25% per point, based on your mortgage
Condo Questionnaire - $225
Credit report - $50
Flood determination fee - $10
Flood life of loan coverage - $5
Life of loan tax service - $55
Tax certification fee - $25
Lenders Title Policy - $350
Recording Service - $25
Settlement / Closing Fee - $1,000
Title Search Fee - $200
Pre-paid Interest - Based on when you close and your interest rate.
Appraisal Fee - $450-$550
Recording Fees - $100
Property Taxes - Based on the home's tax value
Pre-paid and/or Escrow Homeowners Insurance - Based on your insurance policy
Pre-paid and/or Escrow Mortgage Insuance - Based on your credit score and lender
HOA Dues - Based on the home's HOA
Owner's Title Insurance Policy - $50