What are Closing Costs?

What are closing costs?

Closing costs are lender and third-party fees paid at the closing of a real estate transaction, and they can be financed as part of the deal or be paid upfront. They range from 2% to 5% of the purchase price of a home. (For those who buy a $150,000 home, for example, that would amount to between $3,000 and $7,500 in closing fees.) Understanding and educating yourself about these costs before settlement day arrives might help you avoid any headaches at the end of the deal.

What’s included in closing costs?

Closing costs will cover both recurring and nonrecurring fees that are a part of your transaction. Recurring costs are ongoing expenses that you will continue to pay as a homeowner, with a portion due upon closing; nonrecurring fees are one-time fees associated with borrowing money and the services that were required to purchase the property.

Recurring closing costs are placed in your escrow account, which you might view as a forced savings account for those upcoming home expenses you’ll be facing. They can vary, but the most common ones are property taxes (one to eight months’ worth, depending on when your home purchase coincided with the local tax billing cycle), homeowners insurance (the annual premium is typically due at closing, plus another two or three months’ worth of payments), and prepaid loan interest (for the number of days you’ll have the loan until its first payment is due). Also placed into escrow are costs for title insurance, which is considered a must because it protects you in case the seller doesn’t have full rights and warranties to the title of the property.

Nonrecurring closing costs are fees paid to your lender and other professionals involved in the transaction. They include: any home inspection fees; any discount points you’re paying upfront to lower your interest rate; an origination fee, which is charged by the lender to process your loan; a document-prep fee, which covers the cost of preparing your loan file for processing; an appraisal fee, which covers the cost of a professional estimating the market value of the home; and a survey fee for verifying the home’s property lines. Also expect as nonrecurring costs: an underwriting fee for the cost of evaluating and verifying your loan application; a credit report fee for pulling your credit scores; title search and recording fees; and a wire-transfer fee for wiring funds from the lender to your escrow account.

How to prepare for closing costs

The best time to study closing costs is when you’re shopping for a lender and can compare your desired loan amount with interest rates you’re offered (plus any discount points you might plan to pay upfront to lower those rates).

Our team has a list of preferred vendors: Jill Moore with Everbank, Andrew Cady with Nations Lending, and Eric Hall with Atlantic Trust Mortgage.

Then use a closing-cost calculator to determine what your costs might be. The calculator will gauge your monthly mortgage payments, based on whether you’re financing the closing costs into your mortgage or whether you’ve decided to pay them upfront.

Did you know…?

It is possible to negotiate to have the seller contribute funds towards your closing costs. Another possible outcome is for the lender to cover the closing costs. However, be aware of the possibility of an increased interest rate.

As always, please reach out to our team with any questions or concerns!