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If you are a first-time home buyer you have probably heard of closing costs but may not know what they are. These are costs that you pay at the closing of your new home (the finalization of the sales process) and are in addition to the home’s sale price. Closing costs are usually between 2 – 5% of your mortgage, so on a $200,000 loan that would amount to between $4000 – $10,000.
Closing costs tend to fall into the following categories:
- Loan charges – If you are getting a mortgage, your lender will charge some fees for their services and any expenses they have incurred on your behalf. These include loan origination fees, property appraisal costs, and the cost of obtaining your credit report. These are just a few of the more common fees.
- Prorations – For things the seller has paid in advance (such as municipal, county and school taxes), your share will be prorated. The closing agent will determine the proportion of the year for which you will own the home, and the corresponding portion of these fees for which you must reimburse the seller.
- Impounds – Impounds are monies you pay which the lender (or loan servicer) holds in an escrow account. The lender distributes these fees to the appropriate entity on behalf of the borrower when due. Chief among these are property taxes and home owner’s insurance.
- Title charges and escrow – These include the title company’s charges for their products (your lender’s title insurance on your new property and your own title insurance on your new property) and services (such as documentation preparation and delivery fees, notary fees, and a fee for conducting the closing).
- Transfer taxes – You will have to pay fees to the county to record your new deed in the county records and pay taxes to the county and state for costs associated with transferring the property from the seller to you.
- Miscellaneous – This may include such fees as a flat fee charged to buyers by their real estate brokerage, private mortgage insurance, a home warranty if you are purchasing one, etc.
By law, your lender must provide you with an estimated closing statement three days before closing which will tell you how much your closing costs will be. Prior to that time, using an online closing cost calculator (Freddie Mac’s closing cost calculator) is a great way to get an understanding of closing costs for different sized mortgages at different interest rates.
Finally, it is important to understand that most mortgages don’t cover closing costs. As such, the buyer needs to pay at closing by either bringing a cashier’s check to the closing (personal checks are not acceptable) or pre-arranging a wire transfer of the funds.
Stay tuned for the next blog post, which will discuss how to afford closing costs . . .
