Closing Costs Explained

Blog posted On October 14, 2021

When you purchase a home, you don’t typically pay for the whole thing upfront. This is why people get mortgages loans. Once you close on your loan, you will begin making monthly mortgage payments that will pay for your home little by little. When you originate a loan, you will be required to make some initial payments upon your closing. One is the down payment. The other is your closing costs. Though you will get a full breakdown of all of your closing costs in your initial loan estimate and final closing disclosure, here’s a quick overview of the most common closing costs you can expect.

LOAN ORIGINATION FEE - An origination fee is a set payment associated with the establishment of an account with your lender. It covers various origination services such loan application processing, underwriting, funding, and other administrative services.

APPRAISAL FEE - An appraisal fee covers the cost of having a professional appraiser estimate a home’s market value. If the property is under construction, or repairs are required, an additional final inspection fee may be added.

CREDIT REPORT FEE - This covers the cost of getting a copy of your credit report and scores.

TAX SERVICE FEE - A tax service fee ensures that you pay the property taxes on time. This helps protect your lender’s access to collateral in case of default.

CLOSING/ESCROW FEE - These costs are paid directly to the escrow company, real estate attorney, or title company that conducts the closing and distributes funds to third parties involved in your home purchase.

MORTGAGE RECORDING CHARGE - Recording charges cover the cost of legally recording your deed, mortgage, and documents related to your home loan. The documents then become public record.

DAILY INTEREST FEES - These pay for any daily interest that your loan accrues between your closing date and first mortgage payment.

HAZARD INSURANCE PREMIUM/RESERVES - This protects you and your lender in case of loss due to fire and natural hazards. The premium is included in your homeowners insurance and is always paid at closing. After closing, it is often escrowed in the monthly mortgage payment for future premiums.

COUNTY PROPERTY TAXES/RESERVES - This cost can vary depending on what time of year you close on loan and what property taxes are in your area. At closing, lenders need to collect enough money to pay the upcoming installment. They will typically collect between 3 and 12 months of taxes to establish the escrow account. Keep in mind that you are only paying taxes for the portion of the year that you own the home. The seller is responsible for them up until the day the loan closes.

Your closing costs will likely add up to 3% to 6% of your home’s purchase price. For a $400,000 house, this would mean closing costs between $12,000 to $24,000. If you have any questions about what to expect with closing costs, we would be happy to help you out.

Sources: Home Closing 101, Investopedia