Understanding Closing Costs
See also helpful buyer tips and questions and Who Pays for What During and Escrow
You can generally break down all closing costs into two basic groups:
- Amounts paid to state and local governments. These include city, county and state transfer taxes, recordation fees, and prepaid property taxes.
- Costs of obtaining a loan or mortgage. These fees include title insurance, appraisals, credit checks, loan origination and documentation fees, commitment and processing fees, hazard and mortgage insurance and interest prepayments.
There are plenty of fees that you’ll have to pay during the closing. Many of these costs are actually negotiated during the offer and counter offer process. All closing costs are spelled out in the lender’s estimate. The Settlement Statement from escrow shows all actual charges imposed on borrower in connection with the settlement one day before the settlement. If you see a charge that doesn’t make sense, or that no other lender has, it’s time to ask questions.
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Here’s an example of what you can expect to pay (some costs vary widely from state to state, so you should determine exactly what you will have to pay) :
Non Lender/Loan Related Costs
Escrow Company Costs:
This is the fee paid to escrow company for handling the escrow process. Although who pays this cost is negotiated in the offer/counter offers, this fee is customarily paid by each party….buyer pays their fees and seller pays theirs
Transfer Taxes:
In most cities in the South Bay the only documentary transfer fees are for the county. In LA County that is $1.10 per $1,000 of the sales price. Althought this is a negotiable item as well it is standard in the area for the seller to pay this. The one city in our area that has an additional tax is Redondo Beach. The city of Redondo has their own (above the county tax) transfer tax of $2.20 per $1,000 of the sales price. This is negotiable but it is standard practice that buyer and seller split this fee 50/50.
Property Inspection:
We strongly recommend that every home has a physical inspection done during the escrow period. A qualified inspector can find many potential problems early in the process which allows you to request repairs, request a credit, obtain further specific inspections, or even back out of the deal. Inspections generally run between $400 and $750 depending on the size of the home. This, and any other inspections are generally paid by the buyer.
Hazard (homeowners) Insurance: Although this is required by most lenders we’ve put it in the non-lender related category. Generally this needs to be paid for one full year prior to close of escrow.
Lender/Loan Related Costs
Discount and Origination Points:
Points are equal to a percent of the loan amount. 1.00 point is equal to 1.00% of the loan amount. Discount points represent additional money you can pay to the lender at closing. If you pay more points it will lower the interest rate. Usually, for each point you pay for a 30-year loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point. Paying points can be good if you plan on living in the home for a long time.
Origination Points:
(or Loan origination fee) charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan. Origination fees are often expressed as a percentage. A one percent loan origination fee is equal to 1% of the loan amount. Some lenders add origination points into their quoted points while other lenders add an origination point in addition to their quoted points.
Application Fee:
covers the lender’s cost to process the information on your loan. Usually, you must pay this charge at the time you file the application. Some lenders may apply the cost of the application fee to certain closing costs. Generally lenders do not refund this application fee if you are not approved for the loan or if you decide not to take it.
Appraisal Fee:
This fee ($450 to $800 depending on the price of the home) pays for an independent appraisal of the home you want to purchase. The lender requires this estimate of the market value of the house for the loan. Factors to be considered in determining market value are: present cash value; use; location; replacement value of improvements; condition; income from property; net proceeds if the property is sold, etc. The appraisal is a critical factor in determining how much of a mortgage the bank or mortgage company will approve. After the appraisal is completed, the borrower is normally entitled to a copy of the appraisal from the lender.
Credit report Fee:
Three major national credit bureaus (Equifax, TransUnion and Experian) supply lenders with the information on your credit behavior. Consumers typically pay $45 to $55 for this report.
Title search and title insurance:
A title search is a detailed examination of the historical records concerning a property. These records include deeds, court records, property and name indexes, and many other documents. The purpose of the search is to make sure the buyer is purchasing a house from the legal owner and there are no liens, overdue special assessments, or other claims or outstanding restrictive covenants filed in the record, which would adversely affect the marketability or value of title. See details of what Title Insurance is when buying a home or property
Escrow Account:
Most lenders require you to pay for some items that will come due after closing. These prepaid items usually include insurance premiums (for Homeowners Insurance — also called Hazard, or Fire Insurance — and Private Mortgage Insurance) and Real Estate Taxes.
Recording and Transfer Charges: A small fee (to $150 to $350) to cover the cost of the paperwork required to record your home purchase.
Interim interest: Accrued interest from closing date until the end of the month.
