Closing costs are fees and expenses outside of the down payment that are owed when closing on a home. Your closing cost will typically be paid all at once, but it consists of many different expenses. Assuming you choose to get title insurance on your new home, that will typically be included in the closing cost.
What is Included in the Closing Cost on a Home?
While it is good to know that your title insurance will be included in the closing cost, there are plenty of other expenses that add up to the final cost. It is a good idea to at least be aware of each of these things before finally closing on your new home. These fees and expenses can include:
- Loan origination fees – This includes fees for processing and underwriting the loan. Underwriting is an important part of the loan approval process. It is when the lender checks to see if you’re able to repay your loan based on a variety of factors such as credit history.
- Title insurance – Title insurance costs for both the buyer and lender are calculated based on the purchase price of the home.
- Homeowners insurance – The first year of your homeowner’s insurance is generally paid at closing.
- Private mortgage insurance (PMI) – If your down payment is less than 20 percent, you may need to pay private mortgage insurance, which protects the lender against losses if you cannot repay your loan.
- Mortgage points – Mortgage points (sometimes called discount points) are paid directly to the lender at closing in exchange for a lower interest rate on your mortgage.
- Property tax – Normally, six months of advance tax is paid at closing. Taxes vary by location.
- Closing or escrow fee – A fee that goes to the escrow agent who helps you close. It will typically vary based on the purchase price of the home.
- Attorney fees – Some states require you to have an attorney or you may choose to retain one on your own. This fee may be bundled into your closing costs.
- Miscellaneous fees – Smaller fees can also be included during closing, from the cost of a credit check to the cost of registering your purchase with the local government.
How Much are Closing Costs?
The total dollar amount of closing costs depends on where the property is being sold and the value of the property being transferred. Homebuyers will generally pay between 2% to 5% of the purchase price, but closing costs may be paid by either the seller or the buyer. A real estate transaction is a somewhat complex process with many players involved and numerous moving parts.
Once you submit a mortgage application, your lender is required by law to give you a loan estimate within a few days. This is to avoid any major surprise expenses that you did not budget for. The law that requires this is called the Real Estate Settlement Procedures Act (RESPA).