What is Included in Closing Costs?
You’ve heard of the term “closing costs” before, but do you know what they cover? If not, don’t worry – we’re here to dispel the mystery about this fee that you (or the seller, if you’ve so negotiated) pays when you close on your home.
So What is Included in Closing Costs?
The first line item you’ll notice under the closing costs section of your closing disclosure is origination charges. These are the fees you pay to your lender for opening up a loan for you and going through the underwriting process to get your loan approved. You’ll likely see the term “Loan Administration Fee” under this section of your closing disclosure.
Services Borrower Did Not Shop For
Most closing disclosures also contain this section, simply because there are services needed to close a loan and it’s faster and easier to use the lender’s preferred vendors rather than research and find your own. This portion of closing costs includes fees for:
The home’s appraisal, which is necessary because in order for your loan to be approved, your home must appraise for at least the purchase price, otherwise you need to renegotiate a lower price with the seller:
Your credit report fee.
Your tax service fee.
Special circumstances, such as the cost of pulling documents related to your flood zone if you live in one.
Services Borrower Did Shop For
This portion of closing costs can be a little misleading. While your initial loan documents state that you can shop for these services, usually the preferred vendor is listed in the loan application and unless you specifically state you want to shop for your own vendors, the lender’s preference is used.
Don’t let this feel like you’re losing control, though. Most of these costs are related to pulling up the title and getting title insurance for your property (which ensures that the seller is the only person who has a right to sell the house and that no other party has a claim on it). You want to pay these fees because they avoid costly legal issues down the road. And letting your lender default to using their preferred vendor is easier, especially since shopping for a lower-priced option might not be worth the time you invest to do so.
Other Closing Costs
The final section of your closing disclosure will list “Other Costs” that make up your closing costs. These include:
Recording fees for your deed
Prepaid costs for your homeowner’s insurance, interest, property taxes, and if required, PMI.
Payments to set up an escrow account for your homeowner’s insurance, property taxes, and PMI if you have an FHA loan.
How Much Are the Total Closing Costs?
Closing costs, which are due at the time of signing for the mortgage, are typically 2% to 5% of the home’s purchase price. But don’t let these additional fees included in closing costs scare you away from buying a home.
In many markets, it’s very common for sellers to accept offers in which they pay either a majority or all of the closing costs. Before you begin house hunting, ask your real estate agent what is common in your area so you have a better idea of what your overall budget is for your new home.
(READ: FHA Loan Closing Costs)