Understanding the price of Closing Costs

Buying a house can be a confusing hurricane of paperwork, with lots of indecipherable legal documents and technical terms being tossed around. By the time you get to closing, you’re holding on by your fingernails, and just thankful that it’s almost over. You’re exhausted, emotionally and physically, but there’s just a little bit more to learn before you can finally grab the keys and move into your new home.

Closing escrow can be a terrifying process, especially when it comes time to hand over a certified check worth thousands of dollars to a complete stranger. Even with the HUD-1 in hand, it might be hard to know exactly what you’re paying for, but we’re here to help you look like a total professional at the closing table.

What Are Closing Costs?

Generally speaking, closing costs are the fees associated with buying or selling a home, collected on the day you close escrow. If you’re the seller, this might include things like real estate commissions and prorated taxes; for the buyer, charges including prepaid interest, loan origination fees and inspections paid at closing will appear on the documents you sign.

The document used to tally up all your closing costs and credits (including your escrowed deposit) is known as a HUD-1 Settlement Statement, but most people in the real estate industry just call it the HUD-1. This document’s a little confusing to read, but if you start on the last page and end on the first, it will make a lot more sense.

Many different fees may appear on your HUD-1, but below is a list of the most common. Armed with this information, you’ll be ready for closing and not have any unpleasant surprises crop up.

Application Fee. This fee covers some of the costs associated with processing your mortgage loan application.

Appraisal Fee. Although appraisals aren’t expensive, they do cost something — this is the line where that charge appears.

Assumption Fee. If you’re assuming your loan, you may have to pay a transfer fee for the pleasure.

Attorney’s Fees. Even though you may not know it, there’s an attorney that prepares and checks the official documents associated with closing escrow. This is their fee.

Flood Determination Fee. Your lender will want to know the flood status of your home — that is, whether or not it sits in a flood-prone zone as defined by the Federal Emergency Management Agency (FEMA).

Flood Insurance. If your home is determined to be in a FEMA-defined flood zone, you’ll have to buy flood insurance if you’re purchasing it with a mortgage. Flood insurance is one of your prepaid items, and you’ll usually need to pay a year ahead for coverage.

Home Inspection Fee. Your home inspector did a smashing job of protecting your future by finding all the problems in your new home, this is how he makes his living.

Homeowners Association Fees. Houses with homeowners associations (HOAs) have yearly dues attached. You’ll pay your portion of dues for the year at closing.

Homeowners Insurance. Depending on your insurer and lender, you’ll have to pay anywhere from two months to a year of homeowners insurance premiums upfront.

Home Warranty. Home warranties can be huge blessings for buyers of older homes, this is the line where you’ll pay for yours.

Loan Origination Fee. This fee covers the cost of underwriting your mortgage. It may appear instead as an underwriting fee, administrative fee or processing fee.

Mortgage Guarantee Fee. Some loan programs, such as VA or Rural Housing Service (RHS) have guarantee fees instead of upfront mortgage insurance.

Points. Your lender may have talked to you about buying discount points as a way of reducing your interest rate. The cost is usually about one percent of the loan per point, that cost goes on this line.

Prepaid Interest. Loan payments aren’t typically due for up to eight weeks after closing, but your interest starts to accrue right away. Your prepaid interest represents the interest you build up between closing and your first loan payment.

Prepaid Mortgage Insurance. When you borrow more than 80 percent of your home’s value, you’ll usually have to pay for mortgage insurance. Some programs, such as FHA, require both upfront and monthly mortgage insurance premiums.

Property Survey Fee. Homes on established lots in cities don’t usually require a survey, but if you’re buying a new home or a large parcel of land, a property survey may be necessary for the bank to correctly identify your new real estate.

Prorated Taxes. You’ll pay your portion of the year’s taxes. Usually, this figure is much higher in the winter than the summer. If you close near the end of the year, you’ll usually have to pay the upcoming year’s taxes too.

Real Estate Broker Fees. Buyers won’t usually even see this charge on their HUD-1s because the seller is responsible for paying all the Realtors involved for a job well done.

Recording Fee. There’s always a small fee associated with having your title recorded with the local officials.

Settlement Fees. This small fee covers the cost of the settlement agent or title company’s preparation of the HUD-1 and other documents for use at closing.

Title Insurance. There are two types of title insurance: lender’s policies and owner’s policies. Lender’s title insurance may simply be referred to as “title insurance,” you’ll always have to pay this to protect your lender from errors on the title to your home. Owner’s policies cover you in case there’s an inaccuracy on your title and might be optional.

Title Search. Your lender wants to know beyond a shadow of a doubt that no one else can claim a right to ownership of the property you’re buying. A thorough search of the property’s title and history will guarantee that problems won’t crop up later.

Tax Service. A small fee covers the cost of having a researcher retrieve the tax information for your future home and ensures that there are no unpaid taxes on the property.

Typical Fee/RangeFee RecipientNegotiable?
Application Fee$20 to $55Lender or Credit Reporting AgencyUnlikely with traditional lender, possibly with mortgage broker
Appraisal Fee$300 to $500AppraiserUnlikely
Assumption FeeVaries between programs and banksLenderNo
Attorney’s FeesBased on services providedAttorneyNo
Flood Determination Fee$15 to $25LenderNo
Flood InsuranceBased on property and riskInsurance CompanyYou can choose to get multiple quotes from different providers
Home Inspection Fee$300 and up, depending on inspections orderedHome InspectorPossibly
Homeowners Association FeesVaries between HOAsHomeowners Association / Seller (as a reimbursement)No
Homeowners InsuranceBased on property and riskInsurance CompanyYou can choose to get multiple quotes from different providers
Home Warranty$300 to $500Warranty CompanyNo
Loan Origination FeeLimited to 1 percent for FHA, may be up to 5 percent for some loan typesLenderNot on FHA or VA, possibly on Conventional or Non-Traditional loans
Mortgage Guarantee FeeBased on program, 2 to 3 percent is usualLenderNo
Points1 percent of loan amount per pointLenderNo
Prepaid InterestBased on loanLenderNo
Prepaid Mortgage InsuranceBased on program, varies from zero to 2 percentMortgage Insurance CompanyNo
Property Survey FeeVaries widely based on property size, location and difficulty of determining boundariesSurveyorPossibly
Prorated TaxesBased on local tax rateGovernment / Seller (as reimbursement)No
Real Estate Broker FeesFour to six percent of sale price is typical, but can range from small flat fee to 10 percent traditionally, depending on property locationReal Estate BrokerageYes, but only by Seller
Recording Fee$50 to $150GovernmentNo
Settlement Fees$150 to $300 per partyTitle CompanyUnlikely
Title InsuranceBased on propertyTitle Insurance CompanyNo
Title Search$100 to $115Title Plant / Closing Company (depending on where the title search took place)Unlikely
Tax Service$75 to $100Closing CompanyUnlikely

Paying for Closing

All of this money has to come from somewhere. If you’ve got a substantial amount of extra cash, you will probably just pay your closing costs with a certified check, but many buyers can’t come up with additional funds to the tune of three to ten percent of their loan amount in order to close. Before you panic, call your loan officer — most loans will allow you to finance these sometimes substantial closing expenses into your loan.

Depending on your type of loan, a certain percentage of seller concessions are allowed — these are funds paid on your behalf at closing (and do not include things like necessary home repairs completed prior to closing). The amount of allowable seller concessions varies based on your strength as a buyer, your down payment and the value of the home you’re purchasing, but typically Conventionals will allow up to three percent of the purchase price of your home and FHAs will permit up to six, since the closing costs on these loans are much higher because of the upfront mortgage insurance due at closing.

If you can’t pay your closing costs, you have to go through the paper shuffling process in order to make it work — it’s illegal for the seller to give you any funds directly, and the bank can’t usually directly finance your closing costs because of legal and program restrictions. Gift money can be an option if you’ve got family willing to foot the bill, but it can become seriously messy for your lender.

That’s why your Realtor or lender will suggest that you ask the seller to pay your closing costs on your behalf. Unfortunately, most sellers won’t do this just out of the goodness of their hearts — they’re going to want you to pay them back. So, let’s say you made an offer on your new home of $150,000 and you’re borrowing with a Conventional loan. You’ll request, in writing, that the seller pays up to three percent on your behalf in closing costs and prepaids (your banker or Realtor will have the exact verbiage for you based on your loan).

If the seller accepts, they’ve essentially given you a three percent discount since that was money you were going to have to find on your own otherwise. Your $150,000 house actually cost you $145,500, and you financed your closing costs. Try to keep this in mind when you’re making your offer — even a full price offer asking for concessions might not be all that great of a deal for the seller if they priced their home well. In that sort of situation, you can offer more than the selling price (referred to as “bumping up the price”) in order to persuade the seller to help you with closing fees.

I know it sounds a little fishy, but it’s completely legal and both a common and perfectly normal part of the real estate sales process. Seller paid closing costs are essentially just paperwork shuffling to accommodate today’s buyers within an aged lending framework. The one caveat that I should mention is that once your initial offer has been accepted, it’s too late to ask for your closing costs to be paid, so make sure you mention it right away. Sellers expect to be asked for this concession, so it’s no big deal if you do. But, keep in mind that when the seller put their home up for sale, they had a low dollar in mind — and they’re not going to give you their house for nothing.

If you want seller concessions, make a good offer the first time, don’t ask for too many frivolous repairs and be willing to pay full price for your new home. If you want to really bargain, you should save more money to cover your own expenses before you even look at another house.

Contrary to what you may have learned in some get rich quick real estate seminar booked at the Hilton, sellers need what they need out of their homes and asking for concessions means that you have to be willing to pay for the convenience.

The Cost of Seller Paid Closing Costs

The bill for your seller paid closing costs may seem small now, maybe just a few extra dollars a month, but ultimately you’ll pay quite a lot for wrapping them into your loan. Any time you raise your loan amount, your mortgage insurance, your payment amount and the interest you pay over the lifetime of your loan increase. Sometimes you have no choice but to finance your closing costs, and with rates as low as they are the harm isn’t extreme, but if you can pay your own closing costs, you should. Allow me to show you why.

Let’s say, for example, your new home was priced at $150,000 and you had a 10 percent down payment for a Conventional loan with a rate of 4.5 percent — if you pay your own closing costs, your principal and interest payment is $684.03. But, let’s say your closing costs were three percent of your loan amount and you chose to finance them — that’s another $4,500 on top of it. Suddenly, you’re borrowing $139,500, making your payment $706.83.

Your lifetime costs increase, too — and by a lot more than $4,500. The extra principal, interest and mortgage payments add up to a whopping $8,305.63. That’s an 85% increase over the paltry $4,500 you initially borrowed. You’ve probably got something better to spend $3,805.63 on, don’t you?

Comparison of long term expense of wrapping in closing costs of 90% LTV Conventional Loan on $150,000 home

 Buyer Paid Closing CostsSeller Paid Closing Costs
Interest Rate4.5%4.5%
P + I Payment$684.03$706.83
Lifetime Interest$110,742.81$114,434.24
Lifetime P + I$245,742.81$253,934.24
Closing Costs$4,500$4,500
Lifetime PMI of CCN/A$114.20
Lifetime Cost of CCN/A$3,805.63

What would it look like if you bought that same house with an FHA loan at 4.25 percent and brought the same down payment? The difference in payment between borrowing your closing costs, plus upfront mortgage insurance, and wrapping these expenses in is a mere $34.43, but over the lifetime of that loan, wrapping in the $4,500 in closing costs and $2,441.25 in upfront mortgage insurance will cost you a whopping $6,345.92 in interest and extra mortgage insurance premiums. It’ll hurt a lot more over the long run to borrow your closing costs with an FHA than with a Conventional loan.

Comparison of long term expense of wrapping in closing costs of 90% LTV FHA Loan on $150,000 home

 Buyer Paid Closing CostsSeller Paid Closing Costs
Interest Rate4.25%4.25%
P + I Payment$664.12$698.55
Lifetime Interest$103,604.66$108,976.76
Lifetime P + I$238,604.66$250,976.76
Closing Costs$4,500$4,500
Upfront MIP$2,362.50$2,441.25
Lifetime MIP of all CCN/A$973.82
Lifetime Cost of CCN/A$6,345.92

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