We know that many potential homeowners can be surprised by the number of closing costs that are involved with buying a new home. It’s important to remember that buying or refinancing a home is a complex financial transaction, and there are several 3rd parties that are involved in the sale. They will perform services to complete your home purchase/refinance transaction. Closing costs are the fees that these professionals charge for their services.
Closing costs can generally be broken into two categories – fees that you pay once to obtain your mortgage and fees that you will pay on an ongoing or annual basis. Below is a breakdown of each of the fees you can typically expect to pay and a definition of each.
Below is a list of closing costs that are typically only paid once to obtain your mortgage:
Appraisal Fee -The Appraiser is an independent 3rd party who will evaluate the value of the home you wish to purchase. The appraisal fee is the fee paid to the Appraisal company for this service.
Credit Report – This is the cost to pull your credit reports from the three main reporting bureaus: Experian, TransUnion, and Equifax.
Flood Certification – A flood certification is a report that determines the level of flooding danger that threatens the property you wish to purchase. Depending on the findings, you may have to purchase flood insurance if you live in a flood zone.
Pest Inspection – This is the fee to inspect for termites or dry rot. In some states a pest inspection is required for government loans.
Prepaid Interest – This is a payment to cover the interest that is owed on your home loan between your closing date and your first mortgage payment.
Processing Fee – The processing fee is the charged by your lender to process your loan file.
Recording Fee – The recording fee is the fee charged by a government agency (typically the county) to document the sale or purchase of your property.
Survey Fee – This is the fee for getting an accurate property and boundary measurement by a licensed surveyor.
Title Fees – Are the costs associated with issuing a title insurance policy for the lender and homeowner. This provides protection if someone later sues and says that they have a claim against the property.
Attorney’s Fees – This is the fee charged by a real estate attorney to prepare and review your purchase agreements and contract.
Underwriting Fees – The Underwriting fee is the fee charged by your lender for the underwriters to review and approve your loan.
Below is an outline of closing costs that you will pay on a regular (typically annual) basis:
Property insurance premiums – Property insurance is a policy that provides financial reimbursement to the owner of a home in the event of damage or theft. The property insurance premium is typically paid on an annual basis and may be escrowed.
Flood insurance (if required) – Based on your flood certification report, you may be required to obtain flood insurance policy to purchase your home. Flood insurance is typically purchased on an annual basis and can be rolled into your Escrow account. Flood insurance provides financial reimbursement to the owner of a home in the event of flood damage.
Property tax – Is a real estate ad valorem tax calculated by the local government, which is based on the value of the property. It’s paid by the homeowner and can be put into your Escrow account.
PMI (if required) – Private mortgage insurance (PMI) is typically required if you’re putting less than 20% down to purchase your home. PMI helps protect the lender’s investment in the home.
HOA – A Home Owners Association (HOA) is an organization of homeowners of a particular subdivision, condominium or planned unit development. If your neighborhood, building, or development has an HOA you may have to pay a monthly or annual assessment. The assessments or dues are used to pay for expenses that arise from having and maintaining common property (ie. pool, community center, park, etc.)