You can generally break down all closing costs into three basic groups:
- Amounts paid to state and local governments. These include city, county and state transfer taxes, recordation fees, and prepaid property taxes.
- Costs of obtaining a loan or mortgage. These fees include title insurance, appraisals, credit checks, loan origination and documentation fees, commitment and processing fees, hazard and mortgage insurance and interest prepayments.
- Inspection costs. These are really up to the buyer but most buyers will obtain a home inspection and wood destroying pest inspection at minimum
There are plenty of fees that you’ll have to pay during the closing. Many of these costs are actually negotiated during the offer and counter offer process so make sure to consult with your realtor to understand these costs going in. Once agreed upon they are very difficult to revise. You should be able to get an accurate breakdown of closing costs from your lender, escrow or realtor.
Here’s an example of what you can expect to pay:
Property Inspection – We strongly recommend that every home has a physical inspection done during the escrow period. A qualified inspector can find many potential problems early in the process which allows you to request repairs, request a credit, obtain further specific inspections, or even back out of the deal. Inspections generally run between $400 and $750 depending on the size of the home.
Discount and Origination Points: Points are equal to a percent of the loan amount. 1.00 point is equal to 1.00% of the loan amount. Discount points represent additional money you can pay to the lender at closing. If you pay more points it will lower the interest rate. Usually, for each point you pay for a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point. Paying points can be good if you plan on living in the home for a long time.
Origination Points (or Loan origination fee) charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan. Origination fees are often expressed as a percentage. A one percent loan origination fee is equal to 1% of the loan amount. Some lenders add origination points into their quoted points while other lenders add an origination point in addition to their quoted points.
Application Fee covers the lender’s cost to process the information on your loan. Usually, you must pay this charge at the time you file the application. Some lenders may apply the cost of the application fee to certain closing costs. Generally lenders do not refund this application fee if you are not approved for the loan or if you decide not to take it.
Appraisal Fee: This fee ($450 to $800 depending on the price of the home) pays for an independent appraisal of the home you want to purchase. The lender requires this estimate of the market value of the house for the loan. Factors to be considered in determining market value are: present cash value; use; location; replacement value of improvements; condition; income from property; net proceeds if the property is sold, etc. The appraisal is a critical factor in determining how much of a mortgage the bank or mortgage company will approve. After the appraisal is completed, the borrower is normally entitled to a copy of the appraisal from the lender.
Credit report Fee: Three major national credit bureaus (Equifax, TransUnion and Experian) supply lenders with the information on your credit behavior. Consumers typically pay $45 to $55 for this report.
Title search and title insurance: A title search is a detailed examination of the historical records concerning a property. These records include deeds, court records, property and name indexes, and many other documents. The purpose of the search is to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title.
A title search can show a number of title defects among these are unpaid taxes, unsatisfied mortgages and judgments against the seller. But there are some hidden defects that even the most diligent title search may never reveal. For instance, the previous owner could have incorrectly stated his marital status, resulting in a possible claim by his legal spouse. Other problems include things like fraud, forgery, defective deeds, mental incompetence, confusion due to similar or identical names, and clerical errors in the records. These defects can arise after you have purchased your home and jeopardize your right to ownership.
A certificate of title — issued by a title company that did the title search — offers no protection against any hidden defects in the title which an examination of the records could not reveal. A title insurance protects against any tax liens, unpaid mortgages, or judgments missed in the research of the history of title on the property. If a claim is made against your property, title insurance will, in accordance with the terms of your policy, assure you of a legal defense and pay all court costs and related fees. Also, if the claim proves valid, you will be reimbursed for your actual loss up to the face amount of the policy.
Basically there are two different types of policies – a lender’s policy and an owner’s policy. The lender’s policy protects the lender’s interest in the property as security for the outstanding balance under the buyer’s mortgage. The owner’s policy safeguards the buyer’s investment or equity in the property up to the face amount of the policy. The cost of the policy is usually based on the loan amount.
It is required to obtain a lender’s title insurance policy only if there is a loan involved. If you also desire the protection of title insurance you should purchase a buyer’s title policy although in our area buyers title insurance is generally paid by the seller.
Escrow company: This is the actual fee and some charges for the escrow company itself. Both buyer and seller have these costs and it is standard in our area for each to pay their own. Escrow fees generally run around $2.20 per $1,000 but costs do vary. Other escrow fees may including recording fees, Fed Ex or shipping and notary fees.
Prepaid items: Often times lenders will require some prepaid items (depending on closing date) including prepaid mortgage and interest, prepaid property taxes and hazard insurance.