4. Closing Costs Explained

by Local Title

When purchasing a home, closing costs are an essential part of the transaction that every buyer should understand. These costs encompass various fees and expenses associated with finalizing the real estate transaction and can significantly impact the overall cost of buying a property.

What Are Closing Costs?

Closing costs refer to the fees and expenses that buyers and sellers incur to complete a real estate transaction. These costs are separate from the purchase price of the property and can vary widely based on the property’s location, price, and the terms of the sale. Typically, closing costs range from 2% to 5% of the home’s purchase price.

Common Components of Closing Costs

Loan Origination Fees

Loan origination fees are charged by the lender for processing the mortgage application. These fees typically cover the lender’s administrative costs and can vary based on the loan amount and the lender’s policies. The fee is usually a percentage of the total loan amount.

Appraisal Fees

An appraisal fee is paid to a professional appraiser who assesses the property’s market value. This ensures that the lender is not lending more than the property is worth. The cost of an appraisal can vary but generally ranges from $300 to $500.

Title Insurance and Title Search Fees

Title insurance protects the lender and the buyer against any claims or disputes over the property’s ownership. A title search fee is also included to cover the cost of examining public records to verify the property’s legal ownership. Title insurance and search fees can range from a few hundred to over a thousand dollars, depending on the property’s price and location.

Escrow Fees

Escrow fees are paid to the escrow agent or company that manages the closing process. The escrow agent handles the transfer of funds and ensures that all conditions of the sale are met before closing. Escrow fees typically range from $500 to $1,500, depending on the complexity of the transaction.

Home Inspection Fees

A home inspection is an essential step in the home-buying process, as it helps identify any potential issues with the property. The buyer typically pays the home inspection fee, which can range from $300 to $500.

Property Taxes and Homeowners Insurance

At closing, buyers may need to pay a portion of the property taxes and homeowners insurance premiums upfront. This ensures that the new homeowner is covered from the date of purchase. The exact amount depends on the property’s location, value, and the timing of the sale.

Recording Fees

Recording fees are charged by local government agencies to record the new property deed and mortgage. These fees vary by location but generally range from $100 to $250.

Attorney Fees

In some states, attorney fees are a part of closing costs. Real estate attorneys review the closing documents, ensure that the transaction complies with state and local laws, and address any legal issues that may arise. Attorney fees can vary widely based on the complexity of the transaction and the attorney’s rates.

Prepaid Interest

Prepaid interest covers the cost of interest on the mortgage from the closing date until the end of the month. This amount depends on the loan amount, interest rate, and the closing date.

Understanding closing costs is crucial for homebuyers, as these expenses can add up quickly. It’s essential to review the Loan Estimate provided by your lender, which outlines the estimated closing costs, and the Closing Disclosure, which provides the final breakdown of these costs before closing. By planning ahead and budgeting for closing costs, buyers can avoid surprises and ensure a smoother home-buying experience.