Understanding all the details of a home purchase can be overwhelming and downright confusing for some, and especially when it comes to closing costs. Before buying, shoppers must budget the future monthly costs of owning, including property taxes and insurance, and then add on the down payment and other fees due at closing. Closing costs are tough to fully understand because they vary by location, lender, and negotiation terms with the seller. In fact, some buyers don’t even realize closing costs are part of the transaction.
A recent study from ClosingCorp, a national provider of residential property closing cost data, showed that 34 percent of homebuyers ages 18-55 are “Not Very” or “Not At All” aware that there are closing costs in a home purchase transaction. And for younger homebuyers ages 18-34 that number rises to 66 percent. Stark statistics considering that closing costs are typically 2 to 5 percent of a home’s purchase price. On a $300,000 purchase of a single family home, this means closing costs are an additional $6,000 to $15,000 on top of the down payment.
Both buyers and sellers pay closing costs in a home sale transaction, but buyers who are financing their home purchases usually have more closing costs than sellers because lenders charge numerous fees. Closing costs for buyers with financing include the following items.
Mortgage origination and processing fees are paid to the lender as their fee for approving and closing the loan. Sometimes all lender fees are bulked into “origination” and/or “processing” line items. Or they could itemize origination, processing, flood certification, and tax service fees. Regardless of how they’re disclosed to you, the sum of these fees are similar between lenders.
Credit report fee is a nominal fee that’s charged for running your credit report.
Appraisal fee is paid to the lender to fund a property appraisal to ensure the home’s value is in line with the purchase price.
Pre-paid interest is the prorated portion of the mortgage payment, based on the time of the month the home is closed. For example, if the buyer closed on the 15th of May, they would prepay interest at closing for May 15 to 31 to cover the prorated June mortgage payment, then the first mortgage full payment starts July 1.
Pre-paid insurance is paid to the buyer-selected insurance company at closing to cover the first year of homeowners insurance.
Title insurance, escrow/attorney and notary/recording fees are paid to an escrow company or attorney to settle the transaction (dependent on state of purchase). Buyers are required to purchase title insurance that guarantees a clean title and pay small fees for signing and recording the closing documents.
Settlement fees can be negotiated with the seller and buyers can sometimes negotiate for the seller to pay for all closing costs.
During pre-approval, lenders provide borrowers with a good faith estimate or GFE – an estimated, itemized list of fees due at closing. At that point, homebuyers know fairly accurately the total closing costs of a home purchase. Home shoppers eager to identify potential costs should revert back to the industry standard of 2 to 5 percent of the purchase price of the home. The most important aspect in the buying process is to stay within budget to prevent future financial struggles and live securely in the new home.
Homeowners who are struggling to pay for their properties should check out Housing Counseling 101.
Tali Wee is a Marketing Content Specialist at Zillow.com. She writes about personal finances, mortgages, and home improvements for the Zillow Blog and other Zillow partners.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.