5 Big Questions For New Home Buyers #5: What Are All These Closing Costs?

As I begin the process of locating and buying my first home, my mind is loaded with questions. This week, I’m answering the five biggest ones (for me, at least) in detail.

I’ve heard all sorts of horror stories about the ridiculous items that mortgage lenders and other such nefarious fellows like to slip into that group of payments collectively referred to as closing costs. Since I only knew that there were a lot of potential fees – and I didn’t have the foggiest idea what some of those fees were – I made a list of many of the normal closing costs that you might be charged with. You may see ones that are outside this list – if you do, ask about it and see if you can avoid it.

Without further ado, here are the closing costs I found during my research.

Inspection fees You’re going to need a home inspection (safety, mold, history, etc), which we discussed discussed yesterday. This will cost a few hundred dollars.

Loan origination fees These are commonly called points and are equal to one or two percent of the cost of your home loan. You can look at it as a way to get a better interest rate: you can get a loan without paying these, but you should expect to pay a higher interest rate if you do. In other words, you’re generally better off paying the points.

Homeowner’s insurance You have to get homeowner’s insurance before you can get a home, and the insurance provider usually requires six months or a year’s worth of premiums for insurance. This could run up to a thousand dollars or so, but then you’re insured for the first year.

Escrow fees These are the costs associated with handling your funds in a way that protects both you and the seller. These fees usually run around a thousand dollars.

Title insurance This is basically a guarantee that the home’s seller isn’t up to some sort of shenanigans involving the title. For example, an unscrupulous seller might try to sell a house that they don’t own. Title insurance protects you and your lender from such fraud.

Legal fees These vary from state to state, depending on whether or not real estate agents are allowed to complete the transaction process. If not, you’ll have to kick a few hundred dollars to a lawyer.

Property taxes If you close witin a paid tax period, you’ll owe the previous owner for the taxes they paid for you. If you close at the end of one, you’ll have to pay the taxes for the next period quite quickly.

Private mortgage insurance (PMI) If you’re paying less than twenty percent down, your lender might require private mortgage insurance (are you getting sick of insurance, too? It’s the result of too many people trying to run scams). If they do, you’ll probably have to pay a year’s worth of premiums in advance, which could add up to a thousand or so.

Prepaid loan interest In advance, you’ll have to pay the amount of interest that accrues from the day your loan closes to the day your first payment is due. This also could be up to a thousand dollars depending on the date.

Courier fees The documents must be delivered safe and fast. Be prepared to pay $50 (at least) for the service.

Notary fees and recording fees All of the documents must be legal and be recorded with the county. This will rack up another $100 or so in fees.

In other words, you should have $5,000 (at least) ready to go for the final home purchase.

I hope you enjoyed this series and found it as informative as I did.

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  1. Shane says:

    Good stuff, I wish I had something like this when I was looking. The cost of purchasing was so much more than I expected. You could even do a “cost to move in” section to cover most of the expenses and purchases you need to make that living at home or an apartment didn’t need.

    Plan on another $500 to $1000 to cover such things as cleaning supplies, trash cans, caulk, tools. Etc.

  2. Chris says:

    Whew, what is the break even point on a house? (I k now thats a very hard question to answer). With all these fees before you ever see any equity at all. Beyond that, you mostly pay interest for a long time on your payments.

    I wonder how long you need to keep your house to come out ahead on all these fees with equity.

  3. Shane says:

    Chris, give or take, based on no money down, zero appreciation of value, and a loan of 100k at 7% you’re looking at at about 5 to 6 years.

  4. it would be a good idea to write on a post about negotiating these fees.

  5. Chris says:

    Ahh, the appreciation is the part of it I forgot about. At the point it’s worth more, you’re getting a return on borrowed money, which is nice. That can cut the breakeven point down to something more reasonable. I’m assuming that a more expensive loan would have a longer break even point, due to paying more interest and the points being higher and such.

  6. Josh says:

    Thanks! Awesome post. I just forwarded this to my sister-in-law who is closing in the next month or so. I also included some advice, which I want to share with you:

    SHOP AROUND!

    1. Homeowner’s and Title insurance costs can be very different between providers. Don’t let your agent, lawyer, or broker select this for you. They don’t really care which is cheapest, and they may be getting a kickback (even if it was just coffee and a pen, it still doesn’t help them choose based on your best interests.)

    2. Notary Fees. We closed on our most recent home in November from 1500 miles away, so we chose our notary. The library let us notarize the dozens of documents for $4 total. How much is your lawyer’s office going to charge you for that service? Have you asked if that price is negotiable?

    3. Inspectors don’t all have the same rates. They also don’t all have the same level of skill. This person is going to give you advice for the single biggest investment in your portfolio–choose wisely.

  7. Cory says:

    One thing to take note of with title insurance: frequently, the title insurance that protects the lender and the title insurance that protects the buyer are separate products. You’ll need to take care that you, the buyer, are covered in the event of title fraud. Title insurance should be available to you, but it may not be put on your closing statement by default.

  8. Fred says:

    As CIO of title insurance company Entitle Direct, I’d like to expand on the important points raised in the 2 prior comments regarding title insurance. Although many consumers don’t realize it, they have the right to select their own title insurance company even if their attorney, realtor or lender offers their own title insurance company recommendations. One reason to shop around is that title insurance referrals often reward the referrer with a commission that may exceed 70% of the policy premium. There is also a consumer perception that title insurance rates are set by their state, but there are only 3 states where rates are mandated by the state: New Mexico, Texas, and Florida (Iowa does not permit title insurance, but instead offers a state title guarantee program). Title insurance in the majority of remaining states is dominated by rating bureaus, which are quasi-private entities formed by title insurance companies; the rating bureau member companies all agree to charge the same rates, which are approved by the state. Given that rates are therefore fixed for the rating bureau member companies, they may tend to compete in terms of incentivizing and obtaining referrals.

    Independent title insurance companies such as Entitle Direct that are not members of rating bureaus are free to submit their own rates in a state for approval, and this can form the basis for rate competition that a smart shopper can benefit from. As an example, Entitle Direct seeks to sell title insurance directly to consumers in over 28 states at a savings of 35% or more via http://www.entitledirect.com.

    When buying title insurance, there are 2 types of policies as mentioned in the previous comment. A lender’s policy protects the interests of the loan provider if a loan is being provided as part of a re-finance or purchase transaction. An owner’s policy protects the interest of the owner, but also comes in 2 varieties: basic and enhanced. A basic policy protects the owner from title defects up to the date of policy issuance; however, title defects can arise after that date that the owner would be exposed to without an enhanced policy. Enhanced policies protect from risks such as mechanic liens, zoning and sub-division issues, as well as post-closing forgeries. It is common for both a lender and owner policy to be purchased as part of a transaction (which by the way should qualify for what is called a simultaneous discount), so the consumer should understand whether basic or enhanced owner coverage is being provided by their title insurance company.

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