Buying a home involves time, energy, and, most of all, money. In addition to committing yourself to mortgage payments for 15 or 30 years, you need quite a bit of money “up-front” to close the transaction that will make the house yours. While most home buyers are keenly aware of the substantial down payment cost associated with purchasing a home, many are less aware of the closing costs, which often add up quickly. Here we will provide a quick overview of these costs.
What are closing costs? These are all of the fees and expenses associated with the closing or settlement of a real estate transaction, and they can vary widely by state. These costs are in addition to the down payment for the home and your monthly payments. The closing costs for a buyer typically range from 2-5% of the purchase price of the home.
Be wary of the statement: Seller pays closing costs. Where allowed, buyers may request assistance from the seller to cover some costs, but the seller is under no obligation to agree to provide this concession. If a seller does agree to do so, they may counter with a higher selling price. Both buyers and sellers typically pitch in on closing costs. 70% of sellers who sold their home in Metro Atlanta in 2017 contributed to some portion of the closing costs.
Closing costs are on top of (in addition to) the purchase price and monthly payments. This can come as a sudden shock to many home buyers who are only looking at the amount of their down payment, especially if the down payment is very low. You will receive a loan estimate when applying for a loan, and should receive a fee sheet from the lender before you make an offer on a home to see in writing what the estimated closing costs will be. Prior to closing, you will receive the Closing Disclosure, an important document that provides exact details of the loan and actual closing costs. Our team will spend time with you helping you understand how to read the fee sheet prior to making an offer, as well as the Closing Disclosure and Settlement Statement prior to closing day to ensure all of these numbers add up.
Below is a list of the most common closing costs:
This is the tax paid when the title passes from seller to buyer.
Recording fees for deed.
A fee charged by your local recording office, usually city or county, for the recording of public land records.
Property taxes and insurance
Property taxes will be split between the seller and buyer accordingly depending on the time of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2 months while the seller would owe taxes for the other 10 months. Prorated taxes usually are paid based on the number of days (not months) of ownership. Most lenders may require you to set up an escrow account to cover these bills. If your lender does not require an escrow account, you may want to set up a special account on your own to make sure you have money set aside for these important, and large, bills.
If your condo or homeowners association requires an annual fee or an initiation fee, you might have to pay it upfront in one lump sum.
Most lenders require that you prepay the first year’s premium for homeowner’s insurance (sometimes called hazard insurance) and bring proof of payment to the closing. This insures that their investment will be secured, even if the house is destroyed.
Title search costs.
Usually your attorney will do or arrange for the title search to make sure there are no obstacles (liens, lawsuits) to your owning the home. In some cases, you may work with a title company to verify a clear title to the property.
Lender’s title insurance.
Even though there is a title search for any obstacle (liens, lawsuits), many lenders require insurance so that should a problem arise, they can recover their mortgage investment. This is a one-time insurance premium, usually paid at closing; it is insurance for the lender only, not for you as a purchaser.
Owner’s title insurance.
This is an insurance policy that protects you in the event someone challenges your ownership of the home. It is usually optional, however we highly recommend you make this one-time purchase. You may want to purchase title insurance for yourself so that if problems arise, you are not left owing a mortgage on a property you no longer own. A thorough title search (going back to 1900 if necessary) is often assurance enough of a clear title.
Loan application or administrative fees.
This covers the cost of processing your request for a new loan and includes costs such as credit checks and administrative expenses. The application fee varies depending on the lender and the amount of work it takes to process your loan application.
In the state of Georgia, an attorney will coordinate the transaction when buying a home. Attorneys usually charge a flat fee for financed purchases and a lower flat fee for cash purchases.
A Tri-merge credit report is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate you’ll get on your loan.
Appraisal fee: It’s important to a lender to know if the property is worth as much as the amount being borrowed. This is for two reasons: The bank needs to verify that the amount you need for a loan is justified, and the bank also wants to make sure it can recoup the value of the home if you default on your loan. The average cost of a home appraisal by a certified professional appraiser ranges between $400 and $500.
Lender’s mortgage insurance.
If your down payment is less than 20 or 25%, many lenders will require that you purchase private mortgage insurance (PMI) for the amount of the loan. This way, if you default on the loan, the lender will recover his money. These insurance premiums will continue until your principal payments plus down payment equal 20 or 25% of the selling price, but they may continue for the life of the loan. The premiums usually are added to any amount you must escrow for taxes and homeowner’s insurance.
Lenders will often require that you set up an escrow account into which you will make monthly payments for taxes, homeowner’s insurance, and PMI (mortgage insurance, if required). The amount placed in this escrow account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender should be able to give you a close approximation of these costs at the time you apply for your mortgage loan.
Your first regular mortgage payment is usually due about 6 to 8 weeks after you close (for example, if you close in August, your first regular payment will be in October; the October payment covers the cost of borrowing money for the month of September). Interest costs, however, start as soon as you close. The lender will calculate how much interest you owe for the fraction of the month in which you close (for example, if you close on August 25, you would owe interest for 6 days). In some cases this is due at closing.