Defining Closings Costs: The Real Cost of Buying a Home
Did you know that the cost of buying a home can go beyond the list price? If you’re financing a home, your mortgage lender will charge a fee, and the lender might require an escrow account. Then there are fees for title search and transfer of ownership. And the closing attorney needs to be paid too. This is what is called closing costs - and they can add up. So let’s dive into the real cost of buying a home!
What are closing costs?
According to Investopedia, “Closing costs are the expenses over and above the property's price that buyers and sellers usually incur to complete a real estate transaction.” Closing costs are fees you pay to your lender, the closing attorney, and the county to register you as the new owner. Use 3% to 6% of the purchase price to estimate closing costs, but consult your closing attorney for a definitive number.
There are three “categories” to these costs: closing costs, the down payment, and the loan to cover the purchase price. You’ve probably heard that a seller can cover your closing costs, and that can be true - they can cover some or all. The seller can not contribute towards your down payment, only towards what is considered closing costs and prepayments (escrow account).
After receiving your loan application, the lender must provide a loan estimate that outlines the estimated closing costs and other details. Although the numbers may fluctuate before closing, it’s an excellent guide for budgeting. Your lender will also provide closing disclosures before closing day. These disclosures will show your estimated closing costs relative to the final closing costs. Also, your agent must give a so-called net sheet to you for every offer and counter offer. The agent usually uses the worksheet from the lender as a basis.
What fees are associated with closing costs?
Lender Fees
Most lenders charge a flat lender fee for their services. Some will also (or instead of) charge a percentage of the purchase price as a so-called origination fee. You pay for a credit report and a flood certification, appraisal, tax service, and interest from closing day to the end of the month. Make sure to pay special attention to the interest and your closing date. Your first mortgage payment will be due on the 1st of the next month, so if you close early in a month, you pay more interest, but it will be almost two months before your first payment is due.
Title and Settlement Fees
The title company and the closing attorney (often the same company) charge these fees. These fees will include a title search to ensure the title of the property you buy is free and clear of any liens, owner title policy and lender policy, and the settlement fee for the closing itself.
Government Recording Fees and Miscellaneous
These are fees for recording you as the new owner. Some miscellaneous fees also apply and could include a new termite bond and home insurance. A lender will require you to pay for 12 months of home insurance at closing, and most lenders will require you to pay more into an escrow account every month to cover the next year of home insurance and property taxes.
How does the closing process work?
Some closing costs will be the same no matter the property's price, while others fluctuate with the price, size, or location. A flat lender fee will be the same, while an origination fee will differ. The property taxes in the Birmingham-Metro area are also very different. The taxes will increase with the size and price, but also between the cities and other neighborhoods within the same city.
Your lender will send a closing disclosure no later than three business days before closing. And the day before closing, the closing company will send out a final settlement statement. You’ll need to bring your closing fees, down payment, etc., via a certified check or wire transfer to your closing day. Make sure to check with the closing attorney to see what they prefer.
