What are closing costs?

Are you in the market to purchase a home or just starting to consider purchasing a home?

Are you wondering how much of your own money you will need or what are the costs involved when purchasing a home?

Earlier, you learned what your typical up front out of pocket costs  could be once you get under contract to purchase a home.  You might want to go back and review those costs, so that you’ll know what you’ll need out of pocket, right away.

Now you can dive more deeply into the actual costs of obtaining financing and purchasing a home.

There are a couple different areas that “costs” are typically grouped into:

1. Your down payment.
2. Your closing costs.

Learn more about down payments here.

Closing costs explained, the short and sweet version.

Closing costs are costs  associated with your home purchase and they are typically related to a few different items.

As a general rule of thumb, your closing costs should be in the area of 3% of your anticipated purchase price.

For example:  With a purchase price of $200,000, it’s  $200,000 x 3% = $6,000.

This is a very rough estimation and it really depends on the type of loan you will be getting.

Your actual closing costs could be more or could be less depending on your type of loan and other variables.

There are several different types of loans, including FHA, VA, USDA and Conventional.

Closing costs must be paid when you purchase the home.

For a more detailed explanation, see below.

Closing costs in detail:

Here are the most common closing costs associated with your home purchase:

1. Title company fees
2. Lender fees and Prepaids
3. HOA fees

 Title company fees

Title company fees differ from company to company, although there are three fees that almost every title company charges a buyer.

• The lender’s title insurance policy – this is the insurance policy that you, the home buyer will purchase for your lender to protect against any unforeseen claims to ownership of the home, after your purchase.
• The escrow or settlement fee – this is the fee for title work, including researching the chain of title on the home, to make sure that the seller actually owns the home and has the right to sell it.
• Recording fees – to record your deed at the County Recorder’s Office.

The amount of these fees vary, depending on the purchase price of the home. Here is an example of typical title fees.

Lender fees and prepaid fees

Simply put, you must pay your lender to loan you money.

Lenders make their money by collecting interest from you and collecting fees to give you a loan, many times this is put into a fee called the “Origination Fee.”

Once again, the fees your lender will charge varies depending on the loan program that you use.

Prepaids are charges collected up front to cover different items, such as

1. The interest you pay for the remaining days of the first month you are in your home.
2. Mortgage insurance reserves.
3. Homeowner’s insurance reserves.
4. Property tax reserves.

 HOA fees

If your home is located in an HOA, also known as a Homeowner’s Association, then there are usually fees associated with the transfer of the property to the new owner.  Whether the buyer or seller pays these fees is negotiable.

Usually with an HOA, there will be monthly or quarterly fees as well.

As with everything else, HOA fees can vary, depending on the association and the amenities of the neighborhood.  Typically, the more amenities in the neighborhood, the higher the monthly or quarterly fees you must pay.

Hopefully this has shed a little more light on the subject of closing costs.  If all else fails, just remember the rule of thumb.

Your closing costs will be roughly 3% of your anticipated purchase price.