What Are Closing Costs On A House?
First time home buyers have many essential considerations, and one of their most frequent questions is, What are closing costs on a house?
The closing occurs when an intermediary conveys the title of the purchased home or another piece of real estate. The parties involved can expect that there will be a myriad of “closing costs.” Either the buyer or the seller will have to cover these costs as these are primarily fees for one or the other.
These added expenses of the purchase or refinance may seem undesirable, but they are safeguards that will go a long way towards helping to protect one of the most significant investments that a person can make during their lifetime.
Closing costs can add anywhere between 2 and 10% to the purchase price for a buyer with the percentage increasing as the purchase price decreases. Conversely, a seller will see their final payout decrease based on a similar rate, and so it is vital to be able to decipher the various line items to empower yourself for the best negotiations.
Understanding closing costs on a house will also help to guard against any illegitimate charges. For that reason, the following summary will explain the outlays that are commonplace so that they can be fully understood.
Home Inspection Fees
The structural integrity of a house is one of the most critical factors taken into consideration when buying a home, and so it is typically in your best interest to have a home inspection. An inspection will go a long way towards making sure that you as the buyer are aware of any issues that may come up before you close on the house. The price of home inspections will usually be about $300 to $500.
Real Estate Agent Commission
In most cases, each side of a property transaction is represented by a licensed agent, and they receive a commission for their services at closing. The seller negotiates the commission rate with the agent before the availability of the property is publicized. In the most common transactions, the seller will offer the agent anywhere from 4 to 6% for selling their house. The buyer will also have an agent representing them as well. Both agents will then split the commission at closing. The seller is responsible for paying all charges related to an agent’s representation.
Those who are looking to acquire a condo or a home that is part of a homeowner’s association will usually need to pay all of the yearly fees at the onset of one lump sum. HOA assessments are an essential point to consider and determine in advance because they can often be a surprising part of what are closing costs on a house or condo.
This particular closing cost includes some different items such as administrative expenses or credit checks. The buyer has to pay this to the lender to cover much of the work done. However, these costs can be negotiable.
The lender who comes up with the money and finances the real estate transaction needs assurance that there is enough collateral to make up for the difference in the unfortunate event that the buyer eventually defaults. For that reason, the lender will acquire the services of a certified and professional appraiser. The appraiser ultimately justifies the value of the loan. The fee for their service is usually somewhere between $300 and $400.
If the buyer is taking over a mortgage that is already in place, then there will usually be an assumption fee that can be variable and dependent on the amount of the balance.
The mortgage brokerage is the entity that often acts as an intermediary for the individual who is looking to obtain a loan for a home. Since there is much work involved on behalf of the borrower, a commission of somewhere between 1% and 2% of the purchase price of the home is standard. Except for a seller paying for a Realtor’s commission, in many cases, this will be one of the most significant portions of what are closing costs on a house.
The contract might also denote this form of closing cost under the term “mortgage points” or just “points”. There is a linear relationship so that a single point is equal to one percent of the loan amount, and for each point that paid up-front, there is a reduction in the loan rate usually between 1/8% (0.125%) to 1/4% (0.25%).
A borrower may best determine how points will impact their overall loan by using an online point calculator. A point calculator will give you an idea of your potential savings over the life of the loan. Discount points are more likely to pay off the longer a person decides to keep the house. Knowing the impact of points on a purchase in advance can be quite valuable knowledge.
Mortgage Insurance Fees
Private mortgage insurance can be somewhat confusing, but PMI basically insures the lender and not the home. In any case, you will likely include this if you pay less than 1/5 of the purchase price down. The application fee will vary depending on the lender used.
FHA, VA, or USDA Fees – These organizations might be the ones that are helping with the insurance. They include the Federal Housing Authority with insurance premium fees of 1.75% of the base loan amount, the Department of Veteran Affairs with guarantee fees of between 1.25% to 3.3%, or the U.S. Department of Agriculture with guarantee fees of 2%.
The loan origination fee, aka underwriting fee, is set aside to take care of the lender’s work in preparing the loan. A mortgage loan will require an extensive amount of preparation and evaluation. These underwriters add about 1% of the total amount of the mortgage for this fee. If a person is very adamant about avoiding this cost, then he or she may be able to find loans that do not have this charge. However, the overwhelming majority of lenders are going to take that extra 1% to pay themselves for the work done.
Prepaid Interest is a charge from your lender paid at closing to cover your interest charges between loan initiation and your first payment. You can also call this ‘pro-rata interest,’ and the total sum will depend on the size of the loan.
Property Taxes and Insurance
Homeowner’s Insurance Premium
This premium can vary depending on many different factors. One of the most important is whether or not the property is in a potential disaster area such as an earthquake zone or a floodplain. Though most buyers purchase insurance immediately through closing, note that this insurance premium is only a requirement when there is a loan associated with the purchase. With a mortgage, the borrower will pay their initial annual insurance premium at closing and then pay monthly through escrow.
You will pay local taxes such as those regarding county and municipalities as part of closing costs, and these will likely amount to two months of property tax. After closing, ongoing taxes will be paid through escrow if there is a mortgage.
If the state where the transaction originates requires an attorney to be present, then this is usually to help make sure that paperwork is complete and adherent to the laws of that particular state. The lender and the principals might each be able to have their attorney present for this, and the number of hours will determine the total cost.
Title Search Fee
Liens or claims against a property can cause a considerable amount of stress if not caught before a lot of work and money has gone into the transaction. For this reason, you will usually pay a title search fee as part of the closing costs to cover the conducted title search.
The process has come a long way since the older days with technology making a lot of the work more straightforward, but there are still many cases where some of the records might not be entirely computerized. The total fee for this search is usually around $200, but the exact amount will, of course, depend on the title company and region searched.
Lender’s Title Insurance
As with everything else, the lender needs to have insurance in case there is an uncaught problem with the title that causes trouble in the transaction. The ‘loan policy’ will usually protect them in these types of situations, and you pay it to cover any claims of ownership arising after the fact. Note that Lender’s title insurance is only required when there is a lender involved.
Owner’s Title Insurance
It may also be a wise idea to purchase this same type of protection for yourself when buying a home or property so that you get coverage in the unfortunate event that there is some dispute regarding the title and ownership. One can expect to pay a small fee for this if desired.
As you can see, determining what are closing costs on a house requires a good deal of calculating. In the long run, these are mostly all desirable for the fact that they can help protect and ensure that the transaction goes smoothly for all parties involved.
If it is the first time that you are buying a home, then some of these may come as somewhat surprising. They will vary depending on the localities with counties, cities, and states all having their variations, but the above covers most of the largest and essential fees that you will probably encounter.
However, you should note that there are still some less common and minor fees not mentioned. It is vital that you flesh all of this out with the lender and real estate broker so that you will be certain about what is expected of you. Despite this complication, the purchase of a home should be one of the most rewarding and essential investments of a lifetime.