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Closing costs are due at the completion of a real estate transaction, in addition to the property’s purchase price.
When shopping for a new home, most people pay close attention to the price of the property and the monthly mortgage amount. But closing costs have to be figured into the equation, too, and they can be quite costly. Buyers and sellers may both be subject to these charges at the end of the real estate transaction so it’s important to understand what they comprise.
In this article, we will explore what is included in closing costs and how they are determined.
The basics of closing costs
Closing costs represent the fees associated with real estate transactions or refinancing home loans. They typically amount to 2% to 5% of the loan principal but can vary widely by state. They include a range of charges for services related to applying for a mortgage and finalizing a real estate sale. Some costs are related to the property itself and others stem from the paperwork involved in the transaction, such as attorney fees and the expense of originating and underwriting the loan. Next, let’s explore each of these charges in more detail.
Property-related closing fees
These expenses help verify the home’s ownership and value, which is critical because it represents the collateral for the mortgage.
- Appraisal: This fee covers the work a licensed professional does to determine what the home is worth. While it’s considered a closing cost, you typically pay it long before closing day.
- Home inspection: Separate from the appraisal, the home inspection fee goes to the home inspector who evaluates the home’s condition. While an inspection is technically optional, it’s wise to have one performed so you are aware of any problems with the home. Keep in mind that the cost to fix any problems is additional.
- Title search: Unless you’re buying a newly-constructed home, a title company will search property records to ensure there aren’t any issues with the title of the home, such as an outstanding tax lien.
- Title insurance: Lenders require borrowers to obtain title insurance in case there are issues with ownership after the sale. This policy protects the lender, and the cost is usually 0.5% to 1% of the amount you’re borrowing for your mortgage. For an additional cost, it’s a good idea to purchase your own title insurance policy to protect your financial interest in the home.
- Property taxes: Buyers are often required to pay six months to a year’s worth of property taxes at closing. The amount of this expense varies depending on the state where the home is located.
Mortgage-related closing fees
These are costs associated with generating the mortgage, including fees from the lender.
- Credit report fee: This is what the lender charges to check your credit report and score.
- Origination fee: Lenders can charge this fee for creating the loan, which is generally equal to 0.5% to 1% or more of the amount you’re borrowing.
- Application fee: Many lenders charge several hundred dollars to process the loan application.
- Underwriting fee: Often called an administrative or processing fee, it covers the cost of evaluating and verifying your financial qualifications and eligibility. This can be a flat fee or a percentage of the loan.
- Points: To lower the interest rate on your mortgage, you might also opt to pay another charge known as discount points or mortgage points. Many lenders allow borrowers to pay points in exchange for a lower rate. While it raises your closing costs, it can make a big difference in the amount of interest you’ll pay over the life of the loan.
You may be required to pay additional fees at closing, such as an attorney’s fee. Some cities and states impose fees on real estate transactions, too. Depending on the type of mortgage or property, additional closing costs may include FHA mortgage insurance, a VA loan fee, or a homeowner’s association (HOA) transfer fee.
How much will my closing costs be?
Closing costs are due at settlement when the property title is transferred from the seller to the buyer. The amount depends on the property location and its price. That being said, homebuyers typically pay between 3% and 6% of the purchase price in closing costs. The nationwide average for these expenses for a single-family property in 2021 was $6,905, according to data from ClosingCorp. The highest closing costs incurred by the percentage of the sales price were in the District of Columbia at 3.9%, while Missouri ranked lowest at 0.8%. As you can see, closing costs vary greatly.
Buying a home is one of the biggest investments you may ever make, but the price alone doesn’t tell the whole story of how much money you will need to complete the purchase. To learn more about closing fees or the closing process, Certified Title is here to help. Please contact us anytime.
About Certified Title Corporation: Since 1994, attorney-owned Certified Title Corporation has been furnishing residential and commercial real estate stakeholders across the nation with robust title insurance, settlement, and escrow services. Renowned for their industry-leading reliability and exemplary level of service and quality, the Maryland-based company helps clients from all walks of life achieve their asset goals. To learn more, call (888)486-5511 or visit https://www.certifiedtitlecorp.com/.