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Why Are Closing Costs SUCH a Big Deal?

It's important to understand the closing costs you'll be responsible for when you sign the dotted line.

Buying a home is stressful — period. The searching, the paperwork, the negotiations, and then your carefully accumulated savings, gone in a flash. While the down payment is the primary cost most pay attention to when buying a home, there are other pesky fees to consider, namely, closing costs.

You may have heard the term thrown about in conversation, but what exactly are closing costs? And why are they such a big deal?

Closing costs are lender and third-party fees paid at the closing of a real estate transaction. Typically paid with a cashier’s check, they range from 2 percent to 5 percent of the purchase price. For example, when buying a $150,000 home, you can expect to pay between $3,000 and $7,500 in closing costs — that’s a significant amount of money! Understanding and educating yourself about what closing costs you can expect to pay is the best way to avoid a headache at the end of the transaction.

Closing costs fall into two main categories: recurring (or prepaid) and nonrecurring. Recurring costs are ongoing expenses that you will pay as a homeowner, with a portion due upon closing the transaction; nonrecurring are one-time fees associated with borrowing money and services required to purchase the home.

While not an exhaustive list, the information below is meant to serve as an explanation of the standard items provided on your HUD-1 Settlement Statement. (The HUD-1 is a detailed summary of closing costs provided by your attorney or escrow agent 24 hours prior to your closing date.)

Recurring closing costs

These items are prepaid expenses due at closing and deposited into your escrow account. Think of it as a forced savings account for your upcoming home expenses. The specific costs can include everything from your fire insurance premiums to homeowners association dues, but these are the most commons ones.

  • Property taxes: The seller is responsible for the taxes on the home until the day of purchase, then the buyer assumes the tax liability from the date of purchase to the next billing cycle. The sum varies, but according to Good Mortgage, the average amount of property taxes deposited into your escrow account can be anywhere from one to eight months’ worth.
  • Homeowners insurance: Typically, the total annual premium is due at closing. Additionally, another two to three months of payments are deposited in your escrow account with the lender.
  • Prepaid loan interest: A prorated amount due at closing that includes your loan interest until your first payment the following month.

Nonrecurring closing costs

Lender fees continue to rise, which means shopping around for a good deal is a must. Often, these fees are negotiable — especially when they can be attributed to high administrative costs. Don’t be afraid to ask for the best deal possible and walk away if you feel the cost is unreasonable.

What types of fees can you expect to fork over?

  • Discount points: Paid upfront to lower your interest rate.
  • Origination fee: Charged by the lender to process your loan.
  • Document prep fee: The cost of preparing your loan file for processing.
  • Appraisal fee: Paid to have a professional estimate the market value of the home.
  • Survey fee: Charged for verifying a home’s property lines.
  • Underwriting fee: Covers the cost of evaluating and verifying your loan application.
  • Credit report fee: The cost of pulling your credit scores.
  • Wire transfer fee: The cost to wire funds from the lender to escrow to purchase the home.

In addition to lender fees, a number of costs associated with your closing will need to be paid to your escrow closing agent or attorney.

  • Courier fee: Covers the delivery of paperwork.
  • Title insurance: This policy is a MUST. It protects you in case the seller doesn’t have full rights and warranties to the title of the property; the amount depends on the purchase price of the home.
  • Recording fees: Government fees assessed for recording the new land records.
  • Notary fee: The cost to notarize the Deed of Trust.
  • Escrow fee/Settlement fee: Paid for the services of the escrow agent.

Closing costs are far from simple

In fact, they can be downright confusing and complicated. Lender guidelines, state-specific charges, and vendor rates are tailored to individual transactions. Rather than exhaust yourself with specifics, use this information to help you have informed conversations with your real estate agent and mortgage broker. These professionals are your advocates and will be more than happy to help guide you through the process!