If you’re in the market to buy a home, you probably know that you’ll have to pay closing costs. However, you might be surprised at some of the fees involved in the purchase. Buyers frequently report spending more on closing costs than they were expecting.
To make sure you’re prepared for your closing date, you should know what closing costs to expect. Here are 14 fees that buyers and sellers often overlook:
1. Loan Origination Fee
The origination fee is the charge you pay to your lender for underwriting and processing your mortgage. Your lender may break down the origination fee into a number of smaller charges, such as an underwriting fee, courier fee, and document preparation fee.
Origination fees can vary but usually amount to 0.5% to 1% of your mortgage. This is usually one of the biggest closing costs and often surprises borrowers. Fortunately, origination charges can sometimes be negotiable.
2. Loan Application Fee
Some mortgage lenders charge an application fee in addition to an origination fee, which can come as a shock to borrowers. This charge covers the cost of processing your mortgage application. The amount varies from lender to lender, but some institutions charge as much as $500 in application fees.
3. Credit Report Fee
The credit check is an essential step for your lender to complete your pre-qualification, pre-approval, or final mortgage. Some lenders roll the credit check fee into the application or origination fees, but some charge it as a separate line item. Credit checks usually cost $50 to $100.
4. Title Search
There are several costs associated with the title when purchasing a home. The title search fee is paid to the title company or attorney handling the title.
During the title search, the company will investigate the legal ownership of the property to ensure no one else has a claim to the home. Title searches typically cost between $75 and $200. If the search reveals a dispute about the ownership of the home, the title company should also help you resolve it.
5. Title Insurance
In addition to paying for the title search, you’ll also have to pay for title insurance at closing. There are two types of title insurance: a lender’s policy and an owner’s policy.
Mortgage providers almost always require borrowers to purchase lender’s insurance because it protects them in case a title dispute is discovered in the future. Costs vary significantly from state to state and can be anywhere from 0.1% to 1% of the home’s purchase price.
Owner’s title insurance is optional but protects you as the homeowner in the event of a title dispute. The coverage varies in cost but is usually similar to the price of a lender’s policy.
6. Attorney Fee
Some states require an attorney to be present during the closing meeting. An attorney can be a valuable addition to the closing team even when not required by law. Most attorneys charge by the hour, so the fee will vary depending on how long they’re needed.
7. Escrow Fee
During the closing process, a third party will hold and distribute the funds involved in the transactions. Sometimes, the title company manages the escrow account. In other cases, the service is provided by a separate escrow company.
Escrow fees are often split between the buyer and seller, but this can be negotiated in your offer. Fees usually amount to around 1% of the purchase price.
8. Transfer Tax
Most states charge a tax to transfer a home title from the seller to the buyer. Rates vary by state, but in most areas, transfer tax is around 1% to 2% of the purchase price. The tax is typically split between the buyer and seller, but this can be negotiated in your offer.
9. Recording Fees
The recording fee is the cost paid to the local government to register the transfer of ownership of the home and put the transaction into the public record. This guarantees that your purchase of the home is documented. On average, recording fees cost around $125.
10. Prepaid Interest
Your first mortgage payment probably won’t be due until the beginning of the month following your first full month of homeownership. For example, if you close on your home in January, your first payment will be due on March 1.
However, interest will still accrue from your closing date to the due date of the first payment, and you’ll pay this interest when you close. The charge will be calculated by multiplying the daily interest rate by the number of days between your closing and your first mortgage payment.
11. HOA Transfer Fee
If your new neighborhood has a homeowners association, they may charge an HOA transfer fee. This covers the administrative costs of updating the community’s records and processing the change in ownership of the home.
The seller is usually responsible for paying the transfer fee, but buyers may have to pay the bill in some cases. The cost varies widely depending on the community, but most charge around $200.
12. Homeowners Insurance
Many home buyers are surprised to learn that they have to pay the first year of homeowners insurance up-front. This can be an extra $1,000 to $2,000 or even more due at closing. After making this payment, you’ll likely have monthly insurance payments included in your mortgage, which your mortgage company will keep in an escrow account for the following year.
13. Property Taxes
Property taxes are usually split between the seller and the buyer with both parties being responsible for a prorated amount based on the closing date. For example, if your tax bill is due annually on June 1 and you close on April 1, you’ll owe two months of property taxes because you’ll own the home for two months of the tax year.
14. Private Mortgage Insurance (PMI)
Mortgage lenders charge PMI when borrowers have less than 20% equity in their homes. While this is usually included in your monthly mortgage payment, some lenders require borrowers to pay up-front for PMI at closing.
How Much Should You Save for Closing Costs?
Unfortunately, many homeowners are shocked when they see their total closing costs. It can be incredibly stressful to have to scrounge up money to close on your home in addition to making the down payment and funding your move.
It’s always better to set aside more than you think you’ll need than to come up short at closing. Costs to close can range from 2% to 6% of a home’s purchase price. To play it safe, you should expect to spend at least 6% on closing. If the closing costs end up being less, you can apply the extra funds to your down payment.
Communication and transparency with all the parties involved in the closing is important, too. Ask your mortgage lender, title company, and other parties to send you a cost breakdown as soon as possible. If you’re confused about any of the charges, ask for clarification.
Negotiating can also be helpful when trying to manage your closing costs. For instance, your mortgage lender might be able to reduce the origination fee, or the seller may be willing to offer a credit for some of the expenses. However, you shouldn’t count on negotiations in order to afford your closing costs. Always be prepared to pay the full amount.
When purchasing a home, there are lots of hidden costs that surprise buyers. To avoid sticker shock at closing, be prepared to pay 6% of the purchase price in origination fees, title fees, insurance, and other costs. If you have any questions or concerns about closing costs, consult with your real estate agent or a financial advisor who’s familiar with real estate laws in your area.
