Are you considering purchasing a home for the first time? Then you’re probably already saving money for your down payment. But what about all the other costs needed to complete the transaction? Understanding what expenses are required at closing to buy a house will help you budget and save more effectively. In this article, we break down exactly what closing costs are so you’re prepared when you start shopping for a home:
What are closing costs?
Closing costs are the thousands of dollars associated with buying a home. These expenses vary state-by-state, due to the differences in property and transfer tax, as well as rates charged by different attorneys and lenders.
On average, closing costs equal about 1 to 4% of your home’s value, which isn’t something most home buyers are usually aware of. In fact, according to a study conducted by Wilson Perkins Allen Opinion Research, 50% of buyers were “surprised” by how much they were charged at closing. Knowing exactly how much money you need to come up with, in addition to your down payment, will make purchasing your home a less stressful process.
Here are some of the fees you may be expected to pay before getting the keys to your new home:
1. Loan Origination Fee
Loan origination fees are what lenders charge to set up a loan. This includes courier fees, underwriting fees, appraisal costs, administrative fees, etc. The costs vary depending on the lender, but typically range between 0.5% – 1% of the loan amount.
2. Application Fee
This fee covers your application process for a loan and includes the cost to run a credit report, as well as additional administrative fees. The application fee varies depending on the lender you’re working with but can be anywhere from $300-$500.
3. Mortgage Broker Fee
Closing costs include a commission fee that brokers charge at the end of the mortgage process, which is why homeowners are encouraged to shop around for the right mortgage broker. These fees vary but are usually between 0.5% to 2.75% of the home’s purchase price.
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4. Loan Fee
If your loan is insured by the Federal Housing Administration, the FHA charges an upfront premium of 1.75% of the loan amount.
5. Property Tax
Closing costs include property taxes, which are fees paid to the county treasurer’s office that fund schools, road construction, fire and police departments, as well as other local services. These costs vary depending on your state but can range from $500 to $8,000.
6. Homeowner’s Insurance
Some lenders require homeowner’s purchase insurance before closing on the home. This insurance covers the property in the case of damage and can range between $800-$1,2000.
7. Title Search Fee
Property title searches are performed during the closing process and uncover all available information about a property. For example, who exactly has claims on the home. The title search fee typically ranges between $75-$200. But these closing costs vary, depending on the value of your property and the company you partner with.
8. Title Insurance
Mistakes can happen during the home buying process, and title insurance keeps you from financial loss if there are defects in a title. A title insurance policy varies state-by-state, but title insurance can cost between a few hundred dollars to $2,000.
If you’re interested in purchasing a house, you should first make sure you’re aware of every cost associated with the mortgage process. The best way to do that is by working with a lender who can calculate and break down the fees for you. The more you know about closing costs, the better prepared you’ll be.
