Buying a home can cause sticker shock when you consider that hundreds of thousands of dollars are on the line. Before you close the deal, you’ll need to prepare yourself for another financial shocker: closing costs.
You’ll have to pay closing costs whether you’re buying a house or getting a mortgage refinance. It may be a bit overwhelming when you get your first look at the various costs you’ll have to pay to close your loan.
But don’t stress. We’ve broken down what you’ll have to pay — property taxes, mortgage insurance, title search fees and more. Closing costs will make more sense once you understand what they cover, and how they protect the biggest investment you’ll likely make in your lifetime.
The total you’ll pay can vary greatly according to your home’s purchase price. According to Zillow, the average homebuyer will pay between about 2% and 5% of the sale price in closing fees.
Your lender is required to outline your closing costs in the Loan Estimate and Closing Disclosure forms you receive before the big settlement day. Take the time to review them closely and ask questions about things you don’t understand.
Here’s a closer look at the closing costs you’ll face.
Appraisal fee: It’s important to a lender to know if the property is worth as much as the amount being borrowed. This is for two reasons: The bank needs to verify that the amount you need for a loan is justified, and the bank also wants to make sure it can recoup the value of the home if you default on your loan. The average cost of a home appraisal by a certified professional appraiser ranges between $300 and $400.
Home inspection: Most lenders require a home inspection, especially if you’re getting a government-insured mortgage. Before lending you hundreds of thousands of dollars, a bank needs to make sure the home is structurally sound and in good enough shape to live in. If the inspection turns up troubling results, you may be able to negotiate a lower sale price. But depending on how severe the problems are, you have the option to back out of your contract if you and the seller can’t come to an agreement on how to fix the issues. Home inspection fees, on average, range from $300 to $500.
Application fee: This covers the cost of processing your request for a new loan and includes costs such as credit checks and administrative expenses. The application fee varies depending on the lender and the amount of work it takes to process your loan application.
Assumption fee: If you take over (“assume”) the remaining balance of the seller’s mortgage, you may be charged a variable fee based on the balance.
Attorney’s fees: Eleven states — Alabama, Connecticut, Delaware, Georgia, Massachusetts, New Jersey (northern only), North Carolina, New York, Rhode Island, South Carolina and Vermont — require an attorney to be present at the closing of a real estate purchase. Depending on how many hours the attorney works your case, the fee can vary dramatically.
Prepaid interest: Most lenders require buyers to pay the interest that accrues on the mortgage between the date of settlement and the first monthly payment due date, so be prepared to pay that amount at closing; it will depend on your loan size.
Loan origination fee: This is a big one. It’s also known as an underwriting fee, administrative fee or processing fee. The loan origination fee is a charge by the lender for evaluating and preparing your mortgage loan. This can cover document preparation, notary fees and the lender’s attorney fees. Expect to pay about 1% of the amount you’re borrowing (a $300,000 loan, for example, would result in a loan origination fee of $3,000).
Points: By paying points, you reduce the interest rate you pay over the life of your loan, which results in more competitive mortgage rates. One point equals 1% of the loan amount. So if the loan were $500,000, a 1-point payment would be $5,000. Generally, paying points is worthwhile only if you plan to stay in the home for a long time. Otherwise, the upfront cost isn’t worth it.
Mortgage broker fee: If you work with a mortgage broker to find a loan, the broker will usually charge a commission as a percentage of the loan amount. The commission averages from 1% to 2% of the home’s purchase price.
Mortgage insurance fees
Mortgage insurance application fee: If you put less than 20% down, you may have to get private mortgage insurance. (PMI insures the lender in case you default; it doesn’t insure the home.) The application fee varies by lender.
Upfront mortgage insurance: Some lenders require borrowers to pay the first year’s mortgage insurance premium upfront, while others ask for a lump-sum payment that covers the life of the loan. Expect to pay about 0.5% to 1% of the purchase price for mortgage insurance.
FHA, VA and USDA fees: If your loan is insured by the Federal Housing Administration, you’ll have to pay FHA mortgage insurance premiums; if it’s insured by the Department of Veterans Affairs or the U.S. Department of Agriculture, you’ll pay guarantee fees. FHA insurance premiums are about 1.75% of the loan amount, while USDA loan guarantee fees are 2%. VA loan guarantee fees range from 1.25% to 3.3% of the loan amount, depending on the size of your down payment.
Property taxes and insurance
Annual assessments: If your condo or homeowner’s association requires an annual fee, you might have to pay it upfront in one lump sum.
Homeowner’s insurance premium: Usually, your lender requires that you purchase homeowner’s insurance at settlement, which covers the property in case of vandalism, damage and so on. Some condo associations include insurance in the monthly condo fee. The amount varies depending on where you live, your home’s value, and whether it’s in a potential disaster area (such as a flood plain or earthquake zone).
Property taxes: Buyers typically pay two months’ worth of city and county property taxes at closing.
Title search fee: A title search is conducted to ensure that the person selling the house actually owns it and that there are no outstanding claims or liens against the property. This can be fairly labor-intensive, especially if the real estate records aren’t computerized. Title search fees are about $200, but can vary among title insurance companies by region.
Lender’s title insurance: Most lenders require what’s called a loan policy; it protects them in case there’s an error in the title search and someone makes a claim of ownership on the property after it’s sold.
Owner’s title insurance: You should also purchase title insurance to protect yourself if the title search reveals problems or claims are made on your home after closing. Make sure you purchase a policy that has extensive coverage and few exceptions, and shop around for the best rates.
Image via iStock.