Understanding Closing Costs
Photo by Gabrielle Henderson
One of the main obstacles buyers often seem to overlook are the costs associated with the purchase of a new home. Naturally, a buyer’s main concern — beyond securing financing — is simplified to finding the perfect home. But before that home’s title gets transferred to the new owner, there are closing costs that both seller and buyer need to pay. Some of these are shared and split “down the middle,” like prorated property taxes and HOA dues, but others are specific only to the seller and the buyer. In real estate this is simply known as “cash to close,” and, for buyers, it could be anywhere between three to five percent of the purchase price of the home. However, in order to obtain the most accurate estimate, a real estate agent can share the information of a specific home with the buyer’s lender, who will thereby calculate what the final costs could look like.
The simplest way to understand closing costs is to think about the parties associated with the sale of a home. These costs, then, are broken down between fees from the state, fees from the title company and lender, and fees to the realtor. (As a buyer, your real estate agent is “free” to you. There’s only one small brokerage fee paid to their company.) Each of these parties costs are reflected as a percentage of the purchase price or a set amount per transaction. There could be small variations depending on the title company or lender, and whether you’re a cash buyer, or are using a conventional or FHA loan. The list below shows and explains some of the costs you’re likely to see in your final settlement statement.
Closing Costs
Origination Fee
Payment to lender to evaluate your credit, and to underwrite and process loan.
Discount Points
Paid to lender at closing to reduce interest rate over life of mortgage.
PMI or Mortgage Insurance (Conventional Loan)
Required if down payment is less than 20%. Protects lender if you default.
Appraisal Fee
Paid to appraiser to confirm home’s fair market value.
Title Search
Covers cost to confirm seller owns property, and that title is free from liens.
Title Insurance
Protects lender and (optionally) you if title claim surfaces later.
Termite Inspection Fee (Free for VA loans)
Inspection required to certify home is free of termite damage.
Survey Fee
Charge to verify property boundaries.
Buyer Trans-Fee
Paid to cooperating buyer’s agent brokerage.
Flood Certification Fee
Covers costs to determine if home is in federally designated flood zone. If it is, lender will require you to purchase flood insurance. Some lenders also charge separate flood monitoring fee to check for flood map updates.
Prepaid Interest
Covers mortgage interest due between date of closing and first mortgage payment.
Prorated Property Tax
Covers property taxes from date of closing to end of tax year.
Homeowner’s Insurance
Typically you'll pay full first-year costs upfront at closing.
Homeowner’s Association Transfer Fee
Paid on properties governed by associations to transfer ownership documents to you.
Initial Escrow
Lender may require first two months of next year’s homeowner’s insurance, flood insurance and property taxes to build up reserve.
Closing or Settlement Fee
Paid to title company, attorney or escrow company that conducts closing.
Recording Fee
Paid to state to record transfer of property from one owner to another.
Transfer Tax
Paid to state, based on the amount of the mortgage.
