Written by Carissa Abazia
What are closing costs?
Closing costs are a combination of lender fees, third-party fees, and fees charged by your state or county for recording or transfer taxes.
You will review these fees during the transaction; fees are included in the initial Loan Estimate as well as your Closing Disclosure(s). Here are the different categories:
Section A: Origination Charges (“loan costs”)
- Admin Fee
- Processing Fees
Section B: Services you Cannot Shop For (“other loan costs”)
- Appraisal Fee
- Credit Report
- Lien & Judgment Report
- Flood Certification
Section C: Services You Can Shop For (“3rd party fees” or “title fees”)
- Deed Transfer Fee
- Environmental Protection Lien
- Escrow Fee
- Lender’s Title Insurance
- Loan Tie-In Fee
- Notary Fee
- Recording Service Fee
Section E: Taxes & Other Government Fees
- Transfer Taxes
Section F: Prepaids (“upfront costs”)
- Homeowner’s Insurance Premium for 12 months: One full year of homeowner’s insurance is collected and prepaid to your insurance company at closing; required on all home purchases
- Prepaid Interest: Prepaid interest charges on a mortgage loan represent the amount of interest that you owe between signing your loan agreement and making your first monthly payment
Section G: Initial Escrow Payment at Closing (“other prepaids” or “impounds”)
- This is your initial escrow depositthat you will pay at closing to establish your impound/escrow account, if you are impounding taxes and insurance
- Homeowner’s Insurance Premium for 12 months **required on all home purchases**
- Prepaid Interest
What fees can you expect at closing?
In addition to the fees mentioned above, you’ll be making your down payment at the closing. You may also be paying for “rate discount points” to lower your mortgage rate. Lenders estimate third-party fees for you upfront but will not have those actual fees until they receive final fees from the title company. These fees are variable and subject to change. You will also be offered an owner’s title policy from the title company. The cost for the appraisal is set by a third-party appraisal management company and can vary depending on the property.
You’ll also make prepayments, which are composed of prepaid interest from the date you close through the first of the following month and escrows, which are your homeowner’s insurance and property taxes. Homeowners insurance is paid for a full year in advance and then a few months are collected for your escrow account. Property taxes paid at closing are determined by the title company and depend on when taxes are due and if you are in a state where taxes are paid in arrears or ahead. If you’re establishing an escrow account, your lender will also collect money to make sure you have enough in your account for when your taxes and homeowners insurance payments are due.
Who pays closing costs?
The buyer and the seller both pay some closing costs. Sometimes buyers can negotiate with the seller to pay some of their closing costs. In some cases, a buyer may be offered a loan with no closing costs, which generally means the closing costs are built into the interest rate. You’ll pay a slightly higher interest rate and the lender will cover some of your closing costs. When determining the amount of closing costs you should pay, you should always consider the amount of time you plan on being in the home. If you’re only planning on living in the home for a few years, it might make more sense to take a higher interest rate that covers your closing costs, as you will not recoup those costs in interest savings. However, if you plan on keeping the home for five years or more, it is generally best to pick the lower rate. Your lender can help you determine the best choice for you.
If you bought a house recently, it’s important to know which loan origination fees are tax-deductible, and which are not. Understanding the difference will prove useful when you prepare to file your taxes. Ask your CPA or Accountant which fees are tax-deductible.
It may seem like a lot of money upfront, and it is, but big picture it’s a small investment to own a home & land.
Thanks for reading!