by Nick Gromicko and Rob London
When a home is sold, there is a point in the transaction known as the closing, when the title to the property is transferred to the new owner. The buyer and/or seller commonly incur miscellaneous fees, which are collectively known as closing costs. These fees can be significant, averaging approximately 2% to 4% of the purchase price, although they may be as much as 8%.
Take a look at the following guide to get a better idea of what buyers and sellers are expected to pay upon closing:
- inspection fees. Lenders may require a termite inspection or an analysis of the structural condition of the property in order to assure that a home will be reliable collateral to secure against a loan. An inspection of the septic system and water supply tests may also be required in rural areas. Always be sure to hire an InterNACHI inspector to get the most out of an inspection.
- points. This one-time, prepaid interest is paid by the buyer to the lender as a way to reduce the rate of interest on the mortgage loan. One point equals 1% of the loan's principal. For example, one point on a $200,000 loan is $2,000. If the borrower plans to live in the home for a long time, it might be to his advantage to negotiate for more points. Points can be financed by adding them to the loan, or they may be paid upfront and deducted from the current year’s income taxes.
- title search fees. This one-time fee is used by buyers and lenders to make sure that the seller legally owns the property, and that the property has no outstanding liens or restrictions for use of which the buyer is unaware. If divorces, contested wills or court judgments are discovered during the title search, future complications can be avoided. Anyone may perform a title search, but borrowers commonly hire an attorney or title company to perform a thorough search.
- title insurance. Title insurance policies are purchased to protect the lender against an error in the results of the title search, which would otherwise endanger the lender’s investment in the borrower’s mortgage. In case the title is challenged in court, title insurance will reimburse the insured up to a predetermined dollar amount.
- appraisal fees. Lenders want to be assured that the property to be purchased is worth at least as much as the amount of the loan. An appraisal, performed by a licensed professional appraiser, will determine the fair market value of the property. The requirement of an appraisal may be waived if one has been performed recently.
- recording fees. These are paid to the clerk and recorder's office of the county where the property is located for the service of entering an official record of the change of a property’s ownership.
- application fee. This cost covers the assessment of the buyer's credit report and the initial processing fee of the mortgage loan. The cost is several hundred dollars.
- loan origination fee. This umbrella charge covers the evaluation and preparation of the loan, which may include fees charged by the lender’s attorney or notary. The total cost can be several thousand dollars, although it can be reduced somewhat by a larger down payment.
- prepaid interest. While the new homeowner's first mortgage payment may not be due for some time after closing, interest starts accruing immediately after closing. For instance, if the deal closes on October 11th, the homeowner will owe interest for the 20 days preceding the first mortgage payment.
- prepaid property insurance. Lenders typically require that the first year's premiums of property insurance be paid in advance.
- property survey fee. A survey is performed of the lot and its structures to confirm the deed's legal description of the property, including the property's dimensions, and to check for encroachments, and verify that the house and other structures are where the seller says they are.
- homeowners association (HOA) dues. If the property is part of an HOA, the buyer will need to cover, in advance, the requisite fees for the part of the remaining year that they will own the property.
- property taxes. Like HOA fees, buyers must pay upfront the share of the property taxes for which they are proportionally responsible.
Tips for Reducing Closing Costs
- Home buyers short on cash can roll the closing costs into the mortgage loan. It is also possible for the lender to pay the closing costs in exchange for a higher interest rate.
- Choose a closing date that's near the end of the month, as this will save money on prepaid interest.
- Negotiate with the seller of the property to help pay for some of the closing costs.
In summary, closing costs include a variety of miscellaneous fees paid by the home buyer and/or seller.