When you buy a home, there are essentially two types of payment required upfront. The first is the down payment, where you put cash towards the home to lower the amount of the mortgage. The second is closing costs. In this post we’ll answer some of the common questions around what closing costs are, why they exist and how much you can expect to pay.
What are Closing Costs? A Breakdown
The term closing costs essentially refers to all of the fees due at closing besides the down payment.
How many fees can there really be? Well, it turns out there are quite a few.
For example, the lender has a few fees. A processing fee is to cover all of the costs they’ve incurred to process the mortgage. They had to check your credit to make sure you’re not a high risk borrower, and they’ll tack on a fee to be reimbursed for that. Underwriting fees account for the time their underwriter spent working on your mortgage.
Some lenders break all of these fees out. Others might lump them all together and call it an origination fee. It nets out the same either way.
Other closing costs come from the title. Title settlement services are where a title professional takes the time to conduct the closing of the sale. Title insurance is a fee you pay upfront that – just like other insurance – protects you from loss in case something happens to the title.
Another “bucket” of closing costs is prepaid homeowners insurance and taxes. This is done to ensure you’re protected as soon as the closing is done. It would be bad news if you purchased a home and had a major loss without home insurance. Or if you started off without your taxes being current.
Finally, there are the commissions for the real estate agents. These are actually paid by the seller, but are still considered closing costs.
Why Do I Have to Pay Closing Costs?
The short answer to this is that a lot goes into the purchase of a house!
For example, the lender has to spend a lot of time working with you as the client, underwriting the loan, going through your documentation to enter it into their system, checking your credit, drafting the documents you need to review and sign, etc. Time is money, and they need to be reimbursed for that time spent upfront.
The title company is also spending a lot of time on their services. And we all know that real estate agents work hard to earn that commission check.
The good news about closing costs is that as long as you’re aware they exist and budget accordingly, they’re usually manageable. And you shouldn’t be surprised by them, as your lender will include them on both your estimates and final loan documentation.
How Much Are Closing Costs?
Each loan is different, but closing costs for the buyer are typically between 2% – 5% of the loan. So if you’re buying a $200,000 home, the closing costs will probably be around $4,000 – $10,000.
If you have any other questions about closing costs, send us an email at firstname.lastname@example.org and we’ll make sure your questions get answered quickly.