When you buy a house, there are many costs involved, which may not be apparent in the beginning. They typically include charges like real estate attorney fees, mortgage lender fees, and real estate agency’s closing fees, which are settled at the closing table along with the paperwork. Such charges may be numerous and can mount up really quickly. You may use a closing cost calculator to calculate buyer or seller closing costs and compare loans with different rates, terms, and fees. There are separate closing cost calculators for buyers and sellers, which they can use to estimate their respective closing costs.
Understanding closing costs
Both buyers and sellers may be required to pay multiple closing costs before the papers are signed and the keys are finally handed over. Closing costs imply all fees over and above the purchase price of the property. It may include fees for processing a mortgage loan, realtor commissions, taxes, insurance premiums, property registration fees, along with charges for other related services you might have availed. As per law, it is mandatory to disclose closing costs in advance to buyers and sellers, and agree upon the same, to avoid any conflict later.
Typical buyer closing costs in the US
Closing costs typically amount to 3% to 6% of a property’s purchase price. For example, if you buy a house costing $100,000, your closing costs could be anywhere in between $3,000 and $6,000. It generally depends on the state you are buying the property in, the type of loan you wish to avail, mortgage provider, real estate agency services you engage, realtor commissions, etc. According to a survey conducted in 2019 by real estate closing cost data firm ClosingCorp, home buyers in the U.S. typically spent an average of $5,749 on closing costs. While the District of Columbia, Delaware, New York, Washington State, Maryland, and Pennsylvania averaged higher closing costs, the closing costs in states like Indiana, Montana, South Dakota, Iowa, and Kentucky were found to be the lowest in range. The District of Columbia had the highest average of $25,800, while Indiana registered the lowest closing cost average of $1,909.
Lenders provide a loan estimate after receiving a mortgage application, which includes details and terms of a loan along with estimated closing costs. Before the sanctioning of a loan, you will receive a closing disclosure form, which highlights the original estimated closing costs and final closing costs. You may seek clarification with the lender or real estate agent in case you notice a significant difference in the estimated costs and the final ones. Use a closing cost calculator to add up all the costs and know the total estimated closing costs for a more informed decision.
The impact on interest rates
It is usually seen that lower closing costs can mean a slightly higher interest rate. As the costs inculcated during originating a loan are borne by the lender, it is recouped later by charging a slightly higher interest rate.
Adding up the closing cost
Here is a list of a few standard items you can expect to see on your loan estimate and closing disclosure that make up the closing cost.
Application fee: An application fee or processing fee is typically charged by the mortgage lender for processing your mortgage application and providing you with a loan estimate.
Property appraisal fee: This is a standard payment made to a professional home appraisal company for the assessment of a property’s market value. This amount is then used for determining your loan-to-value (LTV) ratio. The charges usually vary from $300 and $500.
Credit report fee: A lender may charge $15-$30 to acquire your credit reports from the reporting bureaus.
Origination fee: This is to cover the lender’s administrative costs or processing costs and is typically 1% of the loan amount. Sometimes lenders do not charge origination fees. However, they may charge a higher interest rate to cover the costs.
Attorney fee: The charge for engaging a real estate attorney to review the agreements and other documents. However, not all states require an attorney for a real estate transaction.
Closing fee: Sometimes called the escrow fee, this is usually paid to the title company, the escrow company, or an attorney for handling the closing of the deal.
Property tax: You are required to pay any pro-rata property taxes that may be due from the date of closing to the end of the financial year.
Escrow deposit: Sometimes a mortgage policy may require a deposit of two months of property tax and mortgage insurance payments in advance, which is usually deposited in an escrow account during closing.
FHA mortgage insurance premium: You need to pay an upfront mortgage insurance premium (UPMIP) which is about 1.75% of the base loan amount for FHA loans.
Homeowners insurance: The first year’s homeowners insurance premium is usually required to be deposited at closing.
Owner’s title insurance: This protects in case of conflicts regarding ownership of the home.
Lender’s title insurance: An upfront, one-time fee is charged by the title company to protect a lender from ownership dispute or lien that may be found to arise later.
Pest inspection: This typically costs $100 and is required in some states. It is also required for a few government-insured loans. The house is inspected by a professional pest inspector to ascertain the risk of termites, dry rot, or other pest-related damages.
Flood determination charges: A certified flood inspector determines whether your home is in a flood zone, and how much flood insurance you require. Flood insurance is usually not included in homeowner’s insurance policies.
Homeowners association transfer fee: Condominiums, townhouses, or houses within a planned development are governed by homeowner’s associations (HOA). This fee is to cover the charges for paperwork related to switching ownership. It would make sense to check with HOAs for any dues, conditions, or restrictions, before finalizing the deal.
Discount Points: This is an optional, upfront payment made to the lender for a reduction of interest rate so that you can have lower monthly installments.
Private mortgage insurance (PMI): In cases where the down payment is less than 20%, a lender may charge PMI. The first month’s PMI payment is usually made at closing.
Closing costs may also include other costs such as prepaid daily interest charges, or a rate lock fee often charged by lenders for guaranteeing a certain interest rate.
It is recommended you use a closing cost calculator for buyer to know the approximate amount you need to pay every month. You may check on Houzeo, logixbanking, CalcXML, etc. for a reliable calculation.