When you are buying land, a home or other properties, there are certain costs associated with that transaction above and beyond the cost of the land or property. These costs are normally paid at the time when ownership of the land or property is transferred from the prior owners to you, the new owners. The transfer happens at a real estate “closing” and the costs are called “closing costs.” Closing costs typically include not just any costs and fees associated with obtaining a mortgage loan if you are taking a mortgage to purchase the home, but also costs and fees associated with the transfer of the real estate itself.
What are Closing Costs and How Are They Determined?
The amount owed in closing costs and fees can vary greatly depending on several key factors such as whether real estate agents and lawyers are involved in your loan, where you live and whether you are taking a mortgage. Many of these closing costs and fees are determined based on a percentage of the purchase price of the home or property, while others may be flat-rate fees determined by the mortgage lender and others involved with helping you to get a mortgage loan.
Some examples of closing fees include:
- Commission to the buyer’s and seller’s real estate agent. Typically, six percent total commission is paid- three percent to the buyer’s agent and three percent to the seller’s agent.
- Loan origination fees and/or application fees. Typically, there is some cost for originating your mortgage loan. Banks or lenders may charge a flat fee such as an “underwriting” or “application” fee separate to or in addition to the origination fee, or these costs may all be wrapped up into one fee. They may also charge you a fee equal to a percentage of the amount of money borrowed. These fees and costs can vary greatly from lender to lender, so be sure to shop around and factor these fees in when comparing the costs of different loans.
- Loan discount points. Loan discount points are essentially a buy-down of your interest rate. You will pay a one-time cost equal to 1 percentage of the amount you are borrowing in order to lower your loan interest rate by some designated amount (usually between .125 and .25 percent). Lenders may require you to buy a point or you may choose to do so.
- Appraisal costs. This is the cost of having a professional assess the market value of your property. Usually, a flat fee is charged although it may be a higher fee for more expensive properties, more complex properties and commercial properties.
- Credit report fee. This is a small fee that is charged by the mortgage lender to pull your credit report. This should not be more than $50 or so.
- Inspection fees. You may pay a home inspector prior to closing to inspect the home for any possible problems, or the lender may require and pay for an inspector and you would be expected to pay this cost at closing.
- Settlement and closing fees. When you close on a home loan, a settlement agent or an attorney or title company typically prepares all of the documents. They will need to be paid for this service. Usually, this is a flat-rate charge and these fees may be split between both buyer and seller.
- Title search and title insurance fees. A title search is conducted to ensure that the property is going to transfer to you free-and-clear. Title insurance guarantees the search and protects you from any future surprise claims on your property. The fees for a title search may be a flat fee but the fees for title insurance are typically equal to a percentage of the value of the property and/or to a percentage of the loan amount.
- Government fees. Many fees are paid to the federal and state government at a real estate closing including transfer taxes and document or transaction costs. Typically, the cost of these fees is based on the mortgage amount and/or the purchase price amount.
These fees are charged in essentially all real estate closings and are simply a part of the cost of buying a home or property. Additional fees may also be charged as well including fees for attorneys if you or the seller are represented; pro-rated tax payments made to the seller; pro-rated interest to the lender; notary fees; fees for the preparation of documents; private mortgage insurance costs; and insurance costs for flood and hazard insurance. In general, with all of the costs and fees, it is not uncommon for closing costs to equal several thousand dollars depending on the value of the home or property purchased.