You’ve probably heard of the term “closing costs” but might not know what that means. In fact, closing costs play an important part in your home purchase, and tend to be around 2%-5% of the purchase price.
In short, closing costs are the expenses associated with the finalization of a home purchase. The specific breakdown of your estimated closing costs can be found in your loan estimate, with the finalized numbers being in your closing disclosure. Here, we’ll cover the common types of closing costs and what they mean.
Insurance and Title
- Flood determination and monitoring fee: goes to a certified flood inspector to determine if the property is in a flood zone
- Lender’s title insurance: one-time fee paid to the title company protecting the lender if an ownership dispute or lien arises that wasn’t initially found in the title search
- Owner’s title insurance: protects you for the full value of the home if someone challenges your ownership of the property, optional
- Private mortgage insurance (PMI): if you put less than 20% down, your lender will require PMI, and you may have to make the first payment on PMI at closing
- Title search fee: charged by the title company to search title of the home for any discrepancies, such as outstanding ownership disputes or preexisting liens
Program-specific
- FHA insurance mortgage premium: if you’re getting an FHA loan and putting less than 20% down, they require an upfront mortgage insurance premium to be paid at closing, or it can be rolled into the mortgage
- VA funding fee: if you’re getting a VA loan, this is charged for administrative costs
Loan-related
- Application fee: charged by lender to process your application
- Closing fee: charged by the party that handles the closing, usually a title company or attorney
- Credit report fee: a charge of about $15-$30 to pull your credit reports
- Escrow deposit: some lenders require you to deposit two months of property tax and mortgage insurance payments at closing
- Points, or prepaid interest: optional upfront payment to reduce the interest rate on your loan, lowering your monthly payment (one point is equivalent to 1% of the loan amount)
- Origination or underwriting fee: covers administrative costs to process your mortgage
- Rate lock fee: charged to lock in an interest rate for a limited period of time, typically from preapproval until closing
- Prepaid daily interest charges: amount of pro-rated interest your mortgage that accrues from the date of closing to your first mortgage payment
Taxes
- Property tax: pays for any property taxes due within 60 days of the purchase
- Tax monitoring and tax status research fee: goes to a third-party that monitors your property tax payments and alerts your lender of any issues with your payments
- Transfer tax: charged to local government to transfer the title from the seller to the buyer
Property
- Homeowners association (HOA) transfer fee: covers cost of moving HOA fees from the seller to the buyer
- Lead-based paint inspection: pays to test for harmful lead-based paint in the home (usually in houses built before 1979)
- Pest inspection: pays for a professional inspection of any major pest-related for damage
- Appraisal fee: paid to an appraisal company to assess the home’s market value
- Recording fee: paid to local government to officially record the change of ownership
- Survey fee: charged by a surveying company to confirm a property’s boundaries, gas lines, roads, walls, encroachments and improvements
Because what you’re charged is based on both the home and loan program you use, fees will vary. This is a question your handy-dandy mortgage banker can answer for you. If you’re curious about what actually happens at closing, click here.
