A down payment is just one chunk of money you will need when buying a home. You should also have funds available to pay expenses associated with the purchase of real estate. These expenses are collectively known as closing costs.
Buyers and sellers both pay closing costs and who pays what varies from one area to another and with each transaction. Some closing costs are paid on the day your deal closes. Others are paid as your transaction progresses. There are mortgage-related expenses, as well as fees for items such as inspections, insurance, and closing services.
Mortgage-Related Closing Costs
In addition to the direct costs to obtain a loan, lenders also have requirements that result in additional expense to the borrower. Some of the common mortgage-related costs are:
Appraisal fee -- Your lender will require an independent opinion of the value of the property you are buying. Because the property serves as security for your loan, they want to be sure they can at least recover the amount loaned if they have to sell because you default.
Points -- Also called discount points, this charge refers to a one-time, up-front amount that you pay to have the lender offer a lower interest rate. Each point equals one-percent of the loan amount.
Loan origination fee -- This fee covers the lender's administrative costs of processing your loan. It is generally expressed as a percentage of the loan amount. This percentage varies among lenders.
Credit report fee -- Lenders analyze your credit report to help them determine your level of credit risk, the interest rate they will offer, and what loan amount you qualify for. The fee covers their cost of getting that report from a credit bureau.
Prepaid interest -- This is the amount of interest paid to the lender for the time between your date of closing and your first monthly mortgage payment.
Escrow account funding -- You will need to fund escrow accounts if your lender will be paying your real estate taxes and homeowner/hazard insurance. These accounts keep funds in reserve for this purpose. At closing, lenders will collect a tax amount sufficient to insure that they have enough money to make the next tax payment when it comes due. And they may collect an additional amount to have a "cushion." In terms of hazard insurance, you will need to pay the first year's premium.
Private mortgage insurance (PMI) -- If your down payment falls short of 20 percent of the loan amount and you are getting a conventional loan, the lender will most likely require PMI. You may be charged an additional application fee for this purpose, and you will need to pay the PMI premium.
Title fees -- You can also expect fees for a title search, which is done to ensure that there are no liens or problems with ownership. If you buy title insurance as a safeguard against losses from problems that might surface later, you would also pay a premium for that policy.
Other Closing Costs
Other common expenses associated with closing your deal include the cost of a home inspection and a home warranty if purchased. Your attorney or other closing agent will also charge for their services, as well as include fees to record your new deed and other documents in public records, document preparation fees, and a property transfer fee or tax if applicable.
Who Pays What
What buyers pay versus sellers varies with location and depends on what is negotiated and specified in the sales contract. Generally speaking, buyers pay the home inspection fees, hazard insurance, escrow funding, title insurance, and fees associated with getting a mortgage loan.
Because each transaction is unique, you may or may not have all of the closing costs mentioned above. And you might have additional fees that are not covered here. To be sure, ask your real estate agent or closing attorney/agent for an estimate of the expenses you can expect to pay when buying a home in the area.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.