It can be a bit annoying when you’ve agreed on the price of the property you’re buying, and then you find out later on that you still have to pay for closing costs. So what do closing costs cover exactly?
As the name implies, the closing costs are the expenses that need to be paid once the deal has been made, and and such costs are over and above the actual price of the property. There’s still a lot of paperwork to be done, and some services involved in the sale have to be paid for.
It’s crucial that you account for these expenses so that you don’t come up short with your budget. The actual closing costs will depend on the specifics of the sale. However, here are some of the more common fees that usually come up during a real estate transaction:
- Inspection fee. When you buy a home, you need to have it professionally inspected so that you don’t overlook a problem that may cost you a lot of money later on. On average, this will cost about $315, but that may be worth the expense if it exposes a house that may prove to be a money pit later on. You may also negotiate for a lower price when the inspection shows problems that will need fixing.
- Mortgage application fee. Some banks charge a fee when you simply apply for an application. But other banks don’t and perhaps you should go with those banks instead. Application fees can be quite exorbitant, and they can sometimes go for as much as $500. Unlike other “closing” fees, this one may come at the start of the transaction.
- Appraisal fee. Your mortgage lender will need to know that they’re providing an appropriate amount of money for you to buy your home, before you can secure your mortgage. This means that the house must first be evaluated by an appraiser to determine the real worth of the home. This is another fee that may come at the beginning stages of a real estate transaction, and it can cost anywhere from $300 to $500.
- Loan origination fee. Once your mortgage application has been accepted, the bank may require a fee for creating the mortgage for you. This fee is often a seemingly small percentage of the total montage amount, usually at 1% or even 0.5%. That may seem inconsequential, but even half a percent is a lot if the house costs $300,000. That leads to a fee of at least $1,500.
- Points. Like any other loan, mortgages require that you pay interest. However, you can buy points that reduce your interest rate, with each point reducing the interest by 1%. You should discuss this matter with your mortgage loan officer.
- Survey fee. This fee is for the verifying the location and boundaries of the property your buying. Some banks may require that you get the property surveyed first.
- Title search fee. This fee is for the work checking the public records to confirm that you’re indeed buying the property from the actual owner.
- Recording fees. These cover the processes of drafting the new mortgage agreement and the new deed.
- Property taxes. Once you own the property, you’re required to pay taxes on it. The amounts of the property taxes are calculated at the time of the closing, to determine what you as the buyer are responsible for. The seller may also be required to pay their share of the property taxes.
These are annual taxes, and they’re prorated to cover the months of the year during which the particular home owner had possession of the property. Thus, if the seller sells at the midpoint of the year, then the seller is required to pay half of the annual property taxes and the buyer is required to pay the other half.
- Property insurance. This is required coverage for your new property, just like you need to purchase insurance when you buy a car. Consult your lender, as they may have specific requirements concerning the insurance coverage during the term of the mortgage.
- Home warranty expenses. Buying warranties isn’t technically necessary when you buy a new home. However, having a warranty is often a sensible idea, just like having a warranty for a new appliance. The home warranty can cover various issues and problems that aren’t covered by your homeowner’s insurance. These include issues with the plumbing or electrical system, or even with the furniture.
- Brokerage commission. If you engage a real estate broker to help you find or buy your new home, they will demand a percentage of the house price as their commission. Usually this commission is paid by the seller, but it doesn’t hurt to make sure with your broker.
Yes, there are a lot of fees that may apply in a real estate transaction, so you need to make sure you know which fees you’re responsible for during the negotiation process. Knowing the answer to questions like “what do closing costs cover?” is part of your responsibility.