In order to buy a home, you’ll need to pony up some cash. Many Buyers have been saving diligently for a downpayment but are then surprised to receive a loan estimate from a Lender telling them they need to bring several thousands more to the table in order to cover Closing Costs.
In fact, a recent study showed that nearly 20% of first-time home-buyers are surprised to learn that Closing Costs exist at all!
Closing Costs are the fees and expenses associated with finalizing a real estate transaction. How much you’ll pay varies depending on your location, but typically they are going to add up to 2-5% of the purchase price. On Page 2 of your Closing Disclosure, you’ll find an itemized list of all of these expenses. So what are these mysterious closing costs, and what do they cover? Keep reading to find out!
Section A: Origination Charges
Origination charges are the payments to your bank for all the services associated with providing and processing your loan.
- Points: If you’ve chosen to buy mortgage points it’ll be reflected here. Mortgage points, also known as discount points, are fees a homebuyer pays directly to the Lender in exchange for a reduced interest rate. This is also called “buying down the rate.”
- Application fee: The mortgage application fee covers the cost to process your application. (Someone has to process all your employment and bank documents!)
- Underwriting fee: The underwriter take a look at your full financial picture to determine how risky you’d be to lend to. The underwriting fee is included in the loan costs.
Section B: Services You Didn’t Shop For
These are all the required third-party services that your Lender selected for you, like paying someone to do a report on your credit history, or paying someone to review flood zone maps to determine if your property lies within a flood zone.
Other common fees we find in this section include the Tax Monitoring Fee and the Tax Status Research Fee.
Section C: Services You Did Shop For
These are all the third-party services that you may have went bargain hunting for on your own. This could include pest inspections, surveys, title searches, and your attorney’s fee.
Section D: Total Loan Costs
This is a sum of all the charges in Sections A-C. It’s a convenient way to see how much closing on the loan is costing you before we add in the insurance, taxes, and other fees below.
Section E: Taxes and Government Fees
This section includes the expenses that are due to the government, such as recording fees and other taxes. A lender has no control over these costs.
Recording Fees: What the Register of Deeds charges to index your documents and make the transaction official.
Transfer Tax: Rate of $1 of each $500 of the value of the property conveyed. Must be paid prior to recording.
Section F: Prepaids
Prepaids are the upfront cash payments you make at closing for certain mortgage expenses before they’re actually due. These include:
- Homeowners insurance
- Property taxes
- Mortgage interest
- Initial escrow deposit
Section G: Initial Escrow Payment
The initial escrow payment is the money you deposit with the lender that the lender will use to pay future homeowner’s insurance and property taxes.
Section H: Miscellaneous Fees
There very well may be other expenses you’ll need to pay at closing. Some common ones we see are homeowners association fees, a home warranty fee. In the seller’s column, you will also see the commissions that are being paid to the agents for both parties.
Thomas & Webber Law at the Lake
All this talk about numbers and fees might have your head spinning, but now you have a good understanding of all the major categories of fees on the Closing Disclosure! Just remember that these fees and expenses are typically 2-5% of the purchase price, so don’t go into shock when you see the final number. If you’re still feeling overwhelmed, contact us to schedule a consultation. We’ll walk you through every step of the process so that you feel confident and prepared for your residential or commercial closing.
Thomas & Webber Law at the Lake
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