What Are the Closing Costs When You Purchase a Home?

When you are thinking about buying a home or other property, the down payment and the mortgage loan are among the financial aspects you have to take into consideration. Another aspect you need to take into account is the costs that have to be paid at closing. These costs can be significant and they have to be paid at the time of closing, so it is necessary to include them in your budget.

As a general rule, closing costs range from 3% to 5% of the price of the property, and depend on various factors including the agreement between the seller and the buyer regarding who is responsible for the real estate agent's commission and other closing costs, the requirements of the financial institution that granted the mortgage loan, the services required for the closing, the taxes on the property, the insurance required, and the fees of the attorneys, title company agents, notary, and others.

The following are examples of some of the more common closing costs:

Real estate agent commission

This commission is normally a percentage of the property's selling price and is generally paid by the seller. But the commission could be split between the seller and the buyer, depending on what they have agreed. It is important to be clear about this allocation before the closing date.

If you are purchasing a home from the builder, or from the company that has developed the condominiums or other types of homes, you may have to pay a commission to the project development company. This cost is normally expressed as a percentage of the selling price.

Costs related to the mortgage loan

These are charges from the financial institution for processing, approving, and issuing the mortgage loan, including the cost of initiating the loan, or a charge for the mortgage credit application, and the loan discount, called "points", which are the one-time charge from the financial institution to reduce the interest rate charged on the mortgage loan. Each point is equivalent to 1% of the loan amount. This charge depends on how the interest rate on the loan was negotiated.

Other costs related to the mortgage loan include the cost of an appraisal of the property; the cost of a credit report that shows your credit history as a borrower, which the bank used to determine whether to grant you the mortgage loan; inspection costs, to ensure the financial institution about the condition of the property that is securing the payment of the mortgage loan; the costs of applying for mortgage insurance, which guarantees payment of the mortgage loan if the borrower dies, or in case of certain other events stipulated in the insurance contract; acquisition costs, if the buyer assumes responsibility for paying the seller's existing mortgage; and the charges for the fees of the financial institution's attorney.

Costs paid in advance as required by the financial institution

The bank or financial institution may require an advance payment from the buyer of the interest that accrues on the mortgage loan from the closing date to the date of the first installment on the loan.

Advance payment may also be required for the first year's premium, or a lump sum to cover premiums for mortgage insurance over the life of the loan. In some cases the mortgage insurance premiums could be included in the amount of the loan and are paid with the loan installments.

Closing costs could include risk insurance premiums that protect the financial institution and the buyer against losses from fire, wind storms and other natural hazards. The financial institution could require the buyer to have already contracted this insurance by the closing date, or that the buyer pays for the first year's premium at the time of closing. The cost of flood insurance premiums could also be required at closing.

Escrow account

This part of the closing statement includes the charges that are required to be paid to an escrow account for the payment of local and county property taxes, annual fiscal appraisals, mortgage insurance, risk insurance, and other costs. The financial institution normally requires a reserve of at least two months to cover these expenses, but it cannot collect more than a certain amount for the escrow account.

Normally the mortgage loan installment that is paid each month includes amortization of the principal, interest, taxes, and insurance. Generally, property taxes are paid twice a year and insurance premiums are paid in advance. For example, if the total taxes for the year are $1,200 and the insurance premiums are $600 a year, the monthly payment, in addition to principal and interest, would include $150 for taxes and insurance ($1,200 / 12 + $600 / 12). Now, if the taxes are paid in November and the closing takes place in September, the financial institution could require the payment at closing of several months of the portion of the monthly payments that correspond to taxes and insurance, to have in a reserve account, in order to have the funds needed to pay the taxes and insurance when they are due.

Title costs

These costs cover various services provided by a title company or other companies, such as attorneys' fees or the costs of the agent in charge of the closing or the escrow account; the cost of an extract of the title, and title search and verification, to ensure that there is no unpaid mortgage loan or fiscal lien on the property; title insurance to guarantee that the title is free from any lien; document preparation fees, which are amounts that some financial institutions charge for preparing the legal documents, such as the mortgage and deeds; notary public fees; and the financial institution's attorney fees to verify temporary safekeeping of the title. Sometimes the seller agrees to pay part of this fee.

Costs of transfer and government registration

These costs can vary a lot from one jurisdiction to another, and include charges for registering the new property deed and the mortgage; the transfer tax imposed by the state and/or local government, which depends on the locality and can be a significant amount; and the local or county government stamp tax, for the deed and the mortgage.

Other costs

The other costs that can appear in the closing statement depend on the particular circumstances of the property and the agreements between the buyer and seller. Some examples of other costs include a survey of the property, costs of extermination of termites and other plagues, and the costs of control and evaluation of the risk of intoxication from lead-based paint.

There could be charges on the closing statement for document dispatch by courier, photocopies, and other administrative costs. When you are buying a condominium or other home with shared spaces and services, it is likely that you will have to pay the homeowners' association dues for a month or more at the time of closing.

Costs paid outside of closing

There could be other costs that appear on the closing statement as "paid outside of closing" (POC). In general, the cost of the credit report to apply for and process the mortgage loan and the property appraisal are paid outside of closing.

Good Faith Estimate

When you as the buyer request a mortgage loan, the lender is obligated to provide you with a "Good Faith Estimate" (GFE) within three days from your application date, with its best estimate at that time of the closing costs. You can use this estimate when you go the closing, in order to compare costs and ask about any charges that appear on the closing statement that were not included in the estimate. Certain of these costs may be negotiable with the financial institution.