When you’re saving money to buy a home or investment property, the major thing that most people tend to think of is the down payment. They concentrate their energy on saving between 3 and 20% (if not more) of the purchase price, depending on the type of financing they will secure.
It can be an eye-opener to learn of all the additional costs that can come up when purchasing a home. Some are directly related to the home buying process, while others will continue, even after the home has been purchased. The total of these are considered to be closing costs and can average between 2 and 4% of the home’s purchase price.
How Do I know What My Total Costs Will Be?
When you apply for a home loan, the lender will provide you with a loan estimate that has mortgage fees explained to you which will be paid on the day you purchase your home.
What Types of Expenses are Included at Closing?
Some closing fees associated with services rendered during the home buying process and include:
• Mortgage fees such as a loan origination fee. This fee is an upfront fee paid when making a new mortgage application and is considered to be the cost of establishing the loan. This typically averages between 0.5% and 1% of the loan amount.
• Home Inspection. A home inspection can be used to identify any potential problems with the home prior to making the purchase. The price of a home inspection can vary but typically costs a few hundred dollars.
• Recording Fees. This represents the cost of legally documenting the new deed for the home along with the mortgage.
• Attorneys Fees. An attorney may be requested to assist with the settlement process of the home. While not all states require an attorney, there are some that do, including:
- District of Columbia
- New Hampshire
- New Jersey
- New York
- North Dakota
- Rhode Island
- South Carolina
- West Virginia
Of course, new legislation happens frequently and so you’ll want to confirm the requirements in your state.
• Wire fees. You will be required to wire the funds for your expenses (or have a cashier’s check available) in order to close on your home. The deed can’t be recorded until funds are fully transferred. If you use a wire to transfer the monies, there may be a fee charged by your bank (or the receiving bank) in order to facilitate this process.
• Title Search. This is the cost of searching the public records for the property you are purchasing to ensure there are no claims against the property.
• Title Insurance Policy. Covers you as the homeowner for as long as you own the property by protecting your title ownership. Lenders also typically have an insurance policy to protect their investment.
• Endorsements. This is an optional add-on to a standard title insurance policy. This can help to provide you with additional coverage on your original policy or remove the exceptions outlined.
• Notary fee. A notary will typically be present at closing to attest to the fact that the person signing the documents is the rightful signer.
• Courier/Delivery. If the lender is required to overnight or hand-deliver certain documents to another party, you may be required to pay a fee for this service.
• State, County, or City Transfer Taxes. Some localities assess additional taxes at the time of property transfer. This varies by location but can be costly depending on the location.
• Points. Points can be paid at the time of closing and help to reduce the interest rate of the loan. You can choose whether or not you’d like to pay points. In addition, you can choose whether or not you would like to receive points. These are considered to be lender credits and can be used to cover some of your closing expenses.
• Underwriting Mortgage Fee. Underwriting mortgage fees are paid to the lender and cover the cost of the research that goes into approving your loan.
• Appraisal Fee. This is the cost of the appraisal report that helps to determine the value of the home being purchased.
• Credit Report. This covers the cost of the report used by the lender in determining your creditworthiness in approving your loan.
• Flood Determination. In some instances, you may need to determine whether or not your potential new home resides in a flood zone. If this does occur, any flood insurance necessary would be considered a separate purchase.
• Pest Inspection. This is the cost to determine whether there are termites or other infestations in the home.
• Survey Fee. Some lenders require a survey of the property to help to determine the legal boundaries, which will also help the buyer should any issues related to the property linearise.
• Document preparation. This is the cost of gathering the final legal documents for closing, including the mortgage and deed paperwork.
• Settlement Fee. This is the amount paid to the settlement agent or escrow account holder. This is one of the costs typically negotiated between the buyer and seller.
• Home Warranty. This is for the cost of issuing a policy to protect the major appliances and other systems in your home from unexpected failure.
These are not the only costs associated when you are purchasing your home. There are others, which you will pay at closing and then continue to pay over the life of your mortgage and/or homeownership. Many of these costs are calculated on a pro-rata basis and the total costs will depend on the day of your closing.
Prepaid Interest. This is the cost to cover the amount of interest to be paid on your mortgage during the first month of your loan.
Property Taxes. This is typically enough to cover six months of property taxes. If these have recently been paid by the seller, some adjustments may be necessary at the time of closing.
Flood Insurance Premiums. If your home is determined to be in a flood zone, you may be required to carry flood insurance in addition to your regular homeowners’ policy.
Private Mortgage Insurance Premiums. Depending on the type of loan that you have and the amount of your down payment, your lender may require that you pay the first year of mortgage insurance premiums at settlement time. Mortgage insurance premiums are typically paid when the amount of the down payment is less than 20%. They help to protect the lender against losses should you default on your mortgage.
As always, there could be additional fees associated with the closing of your home. You will want to work closely with your lender and/or attorney to note any additional fees that might be required.
This may seem like a lot in closing costs and mortgage fees (and they are!) but there are ways to help reduce these costs in some instances.
How Can I Reduce My Closing Costs?
If you are a first-time homebuyer, you may qualify for your costs to be covered by a government agency.
Additional programs are often available that will lend you the amount of the closing fees. This is typically done through an interest-free loan that has no set due date but must be repaid at the time of the sale of the home or refinancing.
You can also plan to negotiate with the seller for the number of costs to be paid. It is important to remember that there may be certain costs that your lender will not allow you to settle on. Check with your financial institution before moving forward.
The closing process can be complicated and overwhelming. Having your mortgage fees explained in a way that you know your financial obligations when it comes to buying your home will help you to sleep better at night.
If you have any questions about the home buying or closing process, please feel free to contact us for more information.