When it comes to buying a home, people often focus on either the down payment or the purchase price. However, there’s another expense that homebuyers will need to come up with before they’re allowed to collect the keys to their new home: the closing costs. Knowing what to expect allows you to be prepared when the bill comes due. What is included in closing costs?
What Is Included in Closing Costs?
Closing costs are the expenses due when you close on the purchase of a home. According to U.S. News and World Report, the national average for closing costs on a single-family home in 2020 was $6,087. Closing costs typically total about two to five percent of the home’s purchase price. Both buyers and sellers typically accept some of these costs. The exact split is negotiable, but traditionally sellers are responsible for real estate agent fees and buyers pay their loan-related costs.
Breaking Down Closing Costs
What is included in closing costs? The mix of closing costs that you’ll be responsible for will depend on your location, your loan, and the services that you require. Zillow offers a list of common closing costs:
- Application fee. This is the cost of processing your loan application.
- Appraisal fee. This is the home appraiser’s fee.
- Attorney fee. If a lawyer reviews the closing documents, their fee will be part of the closing costs.
- Courier fee. This expense covers the cost of transporting necessary documents.
- Credit report. This is the price for pulling your credit report in order to qualify you for the home loan.
- Escrow fee. The payment for the escrow company or attorney conducting the closing for their services.
- Home inspection fee. Lenders generally require a home inspection to verify the condition of the property and see if repairs are needed before they agree to a loan.
- Homeowners insurance. The first year of this coverage, which covers possible damage to the home, is often paid at closing.
- Lender’s title insurance. This is an insurance policy that protects the lender’s interests if a problem arises with the home’s title. Its purchase is typically mandatory.
- Lead-based paint inspection fee. This covers the cost of checking the home for the presence of lead paint.
- Loan discount points. An optional purchase, these are a form of prepaid interest and a way of buying a lower interest rate. Normally, one point costs one percent of your loan amount.
- Owner’s title insurance. This is an insurance policy that protects the homeowner’s interests if a problem arises with the home’s title. Its purchase is typically optional.
- Origination fee. Sometimes called origination points, this covers the lender’s administrative costs.
- Pest inspection fee. This is the charge to inspect for termites, dry rot, or other pests. It’s required in some states and by government loans.
- Prepaid interest. Borrowers are expected to prepay any interest that will accrue between closing and the date of the first mortgage payment at closing.
- Private mortgage insurance. Homebuyers who put down less than 20 percent with a conventional mortgage will need to pay PMI. The first month will likely be due at closing.
- Property taxes. Any tax monies due within 60 days of purchase will be due at closing.
- Recording fees. The city or county typically charges a fee to record public land records.
- Survey fee. This is the payment sent to the survey company.
- Title search fee. The title company is charged with ensuring that the deed to the home is clear. This is their payment.
- Underwriting fee. This fee reimburses your lender for the cost of evaluating the efforts of underwriting the loan.
Reducing Closing Costs
If you’d like to keep closing costs trim, Investopedia offers a few suggestions. Start by negotiating for services and shopping around to get the best deal. Closing at the end of the month can also keep the totals of prepaid interest lower. Finally, buyers on tight budgets can try negotiating with sellers for assistance on closing costs.
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