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What’s Included in Closing Costs?

06/28/2022 Erik Ringerud

CLOSING ESCROW LOAN PROCESS TITLE

When you’re ready to close on your new home, you’ll find there’s one more round of payments to make: closing costs. Getting a mortgage isn’t free, and closing on a house isn’t free. There are costs through this last phase of the process of buying your home. You’ve probably heard about closing costs and that they crop up at the end of the homebuying process, but what exactly do closing costs include? How can you figure out how much your closing costs could be? We’ll walk you through all the details of closing costs and how to navigate through the last part of closing on your new home.

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What Are Closing Costs?

At the most basic level, your closing costs are any costs or fees that go over the price for the property you’re purchasing. More specifically, closing costs are fees that you (as the buyer) will pay to third parties who have performed services for purchasing your home. Throughout the process of buying a home, many professionals have contributed important services, and both buyers and sellers will need to pay fees for that before the property can be officially sold.

Why Are Closing Costs Necessary?

At this point in the home buying process, you’re probably wondering why closing costs are necessary. After all, you’re already paying a down payment, potentially a mortgage payment, and potentially other fees. So, why are there closing costs as well? A real estate purchase includes many players and moving parts to reach the final sale, and each of the players and parts do cost money. From taxes, to inspection fees, to mortgage fees, you’ll need to make sure each party is paid to fully purchase your home. That’s why there are closing costs. The closing costs are necessary to make sure every fee and professional is properly paid, so you can become a homeowner.

Who Pays Closing Costs?

Closing costs can apply to both the buyer and seller.

Most of the fees involved in closing costs apply primarily to the buyer, so usually the buyer pays most of the closing costs. But some sellers will negotiate with you about closing costs and contribute a larger percentage of the closing costs. If a seller agrees to pay more of the closing costs, that’s called seller concessions. A seller can only contribute a certain percentage of the closing costs, and that exact amount will depend on the type of loan you are getting and how much of the down payment you are paying. Here’s the basic breakdown of how much a seller could pay for a conventional loan:

  • Down payments of 25% or more—sellers can contribute 9% of closing costs
  • Down payments of 10–24.99%—sellers can contribute 6% of closing costs
  • Down payments less than 10%—sellers can contribute 3% of closing costs

If you’re buying a second property (such as an investment property), sellers can contribute the same amounts for down payments above 10%. Most second properties require higher down payments, so down payments under 10% aren’t applicable in most cases.

If you aren’t using a conventional loan, there are other limits for seller concessions. For example, if you have an FHA loan, there is a standard limit that sellers can only contribute 6% based on the appraised value and the price of the property.

What Is Included in Closing Costs?

What do closing costs include? Closing costs can include a variety of fees, costs and taxes that could be applicable to your purchase. Many are required, and some will vary from state to state. Not every closing cost payment will include everything. You’ll need to check with your lender to determine exactly what will be included in your closing costs for your transaction. These are many of the fees that may be included in closing costs that you should be aware of as you prepare your closing documents:

Application Fee

The application fee is required for your mortgage lender to process your mortgage application. Though your application has been approved by this point, the fee for processing your application often isn’t paid until you close. It can also be used as a deposit toward other closing costs if you pay it earlier. Even if your loan is rejected, the application fee is non-refundable. Not every lender will require an application fee, and the exact amount it will cost will depend on your lender. Some application fees are as high as $500.

Attorney Fee

In some states, you need an attorney to close on your home. If you do, you’ll need to pay attorney fees for their services. This fee will cover the attorney preparing and reviewing agreements and contracts. The costs of the attorney fees will depend on where you live and the rates of each attorney.

Closing Fee

To close on a house, you’ll need to pay whoever handles the closing for their services. The party that handles the closing could be an attorney, the title company or an escrow company. State laws will usually dictate who is legally responsible for overseeing the closing. How much the closing fee costs will depend on what kind of party you need to close and their rates.

Courier Fee

If you’re signing digital documents, you won’t need to pay a courier fee. If you’re signing paper documents, they’ll need to be transported, and the courier fee will be what pays for that to be expedited. Courier fees (if they’re charged) are usually around $30.

Credit Report Fee

Your lender will need to pull your credit report from the three major reporting bureaus. Because of that, most lenders will charge a credit report fee with your closing costs to cover what they had to pay to pull your report. Most credit report fees are between $15–30. Some lenders don’t charge this fee if they are able to get a discount from the reporting agencies.

Escrow Deposit

An escrow account is a special account that holds money for property taxes, premiums, homeowners insurance and mortgage insurance. If you have money in your escrow account, your lender can then use it to make mortgage payments on your behalf. Some lenders require you set aside a few months of property tax and mortgage payments in an escrow account as part of your closing costs. Your lender will determine if you do this and how many months’ worth of payments you’ll put into the escrow account.

FHA Mortgage Insurance Premium

If you’re using an FHA loan for your mortgage, you’ll need to pay the mortgage insurance premium (MIP) upfront as part of your closing costs. The current rate is 1.75% of your base loan amount. This premium payment is separate from your monthly mortgage insurance payments.

Flood Fee

If you live in a flood zone, you’ll need to pay a flood inspector from the Federal Emergency Management Agency to certify your home. The agency will use the data from the inspection to plan for flooding emergencies. The certification will also let you know if you need to purchase flood insurance (which is separate from homeowners insurance). This flood fee will be added to your closing costs to cover the services of the flood inspection and certification only if you need it.

Homeowner Association Fee

If you’re buying a condominium or a property in a planned development, you will be required to join the homeowner association (HOA). As a part of joining, you’ll need to pay a fee to transfer ownership from the seller to the buyer. Often, the seller will pay this fee, but it can depend on how competitive the housing market is or what the specific HOA contract dictates.

Homeowners Insurance

Homeowners insurance covers a certain amount of damage to your home, and it’s required by most lenders. There are additional coverage options for your home, property, and more as part of homeowners insurance, but those are rarely required. Most lenders will require you to pay a year’s worth of homeowners insurance into an escrow account to pay for the first year of insurance premiums. This cost will depend on how much your insurance will cost per month, but it’s usually about $35 for every $100,000 in home value.

Lead-Based Paint Inspection

If you’re buying a house built before 1979, you run the risk of lead-based paint in the home. Lead can cause many health problems, and it can be dangerous to have in your home. So if you’re buying an older home, you may need to pay for an inspector to determine if there’s lead-based paint. It usually costs about $300 for this inspection.

Lender’s and Owner’s Title Insurance

A title is what gives you official ownership of a home, and title insurance is what protects you if someone challenges your ownership of the home. The lender’s title insurance is a one-time payment that protects the lender if an ownership dispute arises. The owner’s title insurance is optional but highly recommended by most legal experts. An ownership lien could arise 10 years down the road, and you’ll be happy you have protection. Usually title insurance costs 0.5–1% of the purchase price.

Origination Fee

Your lender will have administrative costs to process your fees, and this fee will cover that. It’s usually about 1% of the loan amount. Some lenders don’t charge an origination fee, but they’ll charge higher interest rates to cover the costs instead.

Pest Inspection

In some states, you’re required to get an official pest inspection performed before you can officially close on your loan. The average pest inspection costs about $100, and they’ll check for termites, dry rot and more. This fee is sometimes paid by the buyer, seller or lender, so it’s important to work out who will pay it if it’s required.

Points

Lenders allow you to pay upfront using discount points to reduce your interest rate. For each discount point you pay for upfront, you reduce your interest rate by 1%. If you have a mortgage of $100,000, each point would cost $1,000. Discount points aren’t required, and it does depend on your financial goals if they would be beneficial for you in the long run.

Prepaid Daily Interest Charges

Usually there’s a period of time after you close on a loan and when you begin your mortgage payments. During this time, you accumulate interest—pro rata interest. Some lenders will require you to pay this pro rata interest as part of your closing costs. This payment will cover how much interest you accumulate between closing and when you’re scheduled to make your first payment.

Private Mortgage Insurance

If your down payment is less than 20% for a conventional loan, your lender may require you to have private mortgage insurance (PMI). PMI will protect the lender if you default on the loan. In addition to requiring PMI, your lender may require you to pay the first month’s premium as part of the closing costs. How much this fee will add to your costs will depend on your monthly premium amounts, which is about $30–70 per $100,000 loaned.

Property Appraisal Fee

Before you can close, you’ll need to get an official appraisal report for your property. A third-party will determine the fair market value of your property, and that will determine what lenders can give you for your loan. The appraisal will happen long before you close, but the fees associated with the appraisal will be included in your closing costs.

Property Tax

Property taxes are fees paid to the local government and are used to pay for public services. Every homeowner is required to pay property taxes. At closing, your lender may require you to pay a portion of your property taxes upfront. Some lenders will want you to pay a year’s worth of taxes while others may only require you to pay pro rata taxes between the closing date and the end of the tax year.

Rate Lock Fee

Some lenders will require you to pay a fee to lock in or guarantee your interest rate between preapproval and closing. Usually this fee is about 0.25–0.50% of your loan value.

Real Estate Commissions

A real estate agent plays an important role in helping a house sell, and they’re typically paid through commissions from the sale of the property. The seller will pay about 5–6% of the home’s selling price to the real estate agent as part of closing costs. The good news for a buyer is that the seller will usually pay these costs.

Recording Fee

Your local recording office will often charge you an administrative fee for processing official public land records as part of the transaction of your property. This fee is usually about $125.

Survey Fee

In some states, you’ll need an official surveyor to check property lines before you can close. The fee is typically about $300–500, depending on the complexity of the property lines. If you have large or unusual boundaries, the survey fee could cost more.

Tax Monitoring Fees

Usually you’ll have a third party monitoring your taxes and verifying that everything is done correctly. The tax monitoring fee is the cost it takes to hire this third party company that will monitor taxes. The cost will depend on where you live and what company your lender uses.

Title Search Fee

A title company will analyze public property records for any ownership discrepancies with the property you’re purchasing before you close. Their job is to find any ownership disputes or liens that could be a problem or come up later. The title search fee will pay the title company for their services, and it is typically between $200–400.

Transfer Tax

The transfer tax is a fee paid to your local government for transferring the title of the home from the seller to the buyer. The cost of this tax will depend on where you live.

Underwriting Fee

The underwriting fees are paid for services performed by your loan lender. These fees cover the costs of evaluating your application, verifying all your documentation and finally approving your loan. These fees can be as high as $795–800, though it’ll depend on your lender.

VA Fee

If you have a VA loan, there may be an additional fee to offset the cost of the loan for US taxpayers.

How Much Are Closing Costs?

Since closing costs can include so many different fees, they can add up quickly. In general, closing costs are about 3–6% of the price of the home you’re purchasing. For example, if you’re buying a home for $500,000 (and taking out a mortgage for $500,000), your closing costs could be $15,000–$30,000. Your down payment is not included in the closing costs, so when you go to close, you’ll pay both your down payment and the closing costs. Your closing costs will also vary depending on where you live. The average closing costs in the US are about $5,700.

In more expensive areas, closing costs can be much higher than that. For example, the average closing costs in the District of Columbia are about $29,300. Similarly, closing costs in Maryland are around $11,000 on average, and closing costs in Delaware are about $17,000. On the other hand, there are some states that have much lower closing costs. For example, the average closing costs in Missouri are about $1,500. Similarly, Arkansas has average closing costs of about $2,500 and Indiana has closing costs around $2,100. Depending on where you live, you should determine the average closing costs for your area and plan accordingly as you move forward with purchasing your home.

Can Closing Costs Be Negotiated?

The good news is closing costs can be negotiated in many cases. Depending on your situation, you may be in a position to negotiate with the seller for them to pay a portion or most of the closing costs. If you’re buying a highly competitive home, that may not be an option, but if it is, negotiating with the seller is a great way to lower some of your closing costs. While many sellers won’t pay all of the closing costs, you may be able to negotiate at least some of the costs.

How to Find Lower Closing Costs

Closing costs can add up quickly, and you might find that you’re unprepared to pay enormous amounts of costs on top of everything else you have to pay to close on your property. Is there any way to find lower closing costs? Besides negotiating with your seller, there are some other strategies to finding the lowest closing costs you can:

  • Pick your lender carefully. Don’t borrow from the first lender you see; instead, check rates, read reviews, meet with their experts and look closely at each lender option before choosing one. Compare the fees from each lender and choose the one that will provide you with the services you need for the lowest closing costs.
  • Close at the end of the month. With all the fees that come from accumulating taxes and interest, it can save you money to close at the end of the month. You can avoid some of the prepaid fees that way.
  • Roll closing costs into your mortgage. Some lenders will let you add your closing costs into your mortgage instead of paying them upfront. The downside is that you’ll have to pay interest on the closing costs, so that could cost you in the long run.

The Bottom Line

Overall, closing costs are the fees you pay to third parties for their services in the house buying process. Closing costs can include many different fees and will vary depending on your house, your lender, and your location. Are you overwhelmed by the closing costs process? Here at Pennymac, we are ready to walk you through the home buying process and help you navigate the complexities of closing costs. Speak to a Pennymac loan officer today to get started.

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