What closing costs cover when you buy or refinance

When you buy a home, or even if you refinance, one of the things you need to be aware of are the closing costs that are incurred when you finalize the paperwork. These costs cover the services that you need to finalize the transaction.

Brad Benham, vice president and senior mortgage loan officer at Towne Mortgage of the Carolinas, explained most homebuyers can expect closing costs to run between 2 to 4 percent of your loan amount, because many of the costs are fixed rates. For a $300,000 mortgage, that could be anywhere between $6,000 to $12,000. While you can shop around for some elements of closing costs to help lower those costs, some of the pieces of these fees can’t be negotiated. It’s important to be aware of everything that goes into your closing costs so you can be aware of what you’ll be covering with your payment.

“Something I go through with buyers when we’re doing pre-approval is knowing how much money they are going to need,” Benham said. “I’m going to go over how much they’re going to need for a down payment and for closing costs, that way they are prepared to make it work.”

The following fees are some of the elements included in your closing costs, which Benham said should be outlined in a closing cost worksheet with your lender. The estimates are based upon what he’s currently seeing in the Triangle.

Think about appraisal fees as a cost you pay to make sure you’re making a good purchase. The appraisal is done by a licensed professional who looks at the factors that may drive how much the home is worth. That includes comparable homes in the neighborhood, location, the home’s age and condition, its size, any improvements that have been made, and even insights into the local economy. Regardless of whether you’re buying or selling, you want an appraisal to make sure the home is listed at fair market value. If you pay this fee prior to closing, you will not be charged for it again. Cost: $495 in the Triangle.

You’ll need to hire a real estate attorney to file the paperwork that’s involved in the purchase of a home. Your closing attorney will finalize the title, pay your fees, finalize your title insurance premiums, disperse funds, and more. Cost: around $1,000 in the Triangle.

Lenders will pull your credit report for preapproval and during the mortgage lending process, and for each adult whose name will be on the mortgage. Those costs are typically charged back to you through your closing costs. Cost: $55 per report.

Lenders allow you to lower your interest rates by paying for points that can reduce your costs in the long term. “Discount points are not in that two to four percent that I mentioned earlier,” Benham said. “If a person is doing discount points, it would be above that. If a person’s paying one discount point that’s equal to one percent of their loan amount, which equates to maybe a quarter of a percent less an interest rate.”

In other words, a $300,000 mortgage would cost $3,000 for one point. When you pay that fee up front, your lender allows you to buy a reduced long-term mortgage rate. These points will increase your closing costs, but if you know you’ll be staying in a home long-term, it will lower your monthly payment. Cost: varies based upon the points you purchase and your loan.

You’ll need to prepay your escrow account when you close on your home, which is where payments will be disbursed from to pay various fees to finalize payments on your home.

“Typically what you’re going to have as far as your prepaid or your escrow fees that are collected are going to be the per diem interest, which is going to be the per day interest from the day you close to the end of the month. And that’s going to get your mortgage prorated so that it’s always due on the first of the month,” Benham said. “Number two, you’re going to be paying for the first year of homeowner’s insurance at closing. The lender will be collecting about three months of insurance and about five months of taxes for the escrow for next year’s taxes and insurance.”

Your escrow account will remain open throughout the duration of your loan to pay insurance and taxes. As Benham said, you’ll need to be prepared for the following:

Lenders may require a flood certification based on flood zones determined by the Federal Emergency Management Association (FEMA). The determination helps solidify the costs of any flood insurance you may need to obtain for your new home. Cost: $20 for the determination fees; approximately $750 per year if you need flood insurance.

Lenders charge a small percentage of the amount of your loan to process the paperwork, send it to underwriting, and to ensure your mortgage goes through smoothly. These loan origination fees are worthwhile, as they pay the people who work to make sure your transaction is seamless. Cost: between 0.5% and 1% of the total loan amount.

Pest inspections are an important part of the mortgage process. These inspections will determine whether the home you’re looking to purchase has a pest infestation that needs to be dealt with. Some pests, such as termites, may need to be exterminated before a mortgage can be processed. It’s a beneficial feature that fits into your closing costs. Cost: $75 to $100.

The recording fee you may see in your closing costs covers the charges from the state of North Carolina and your local municipality to register the deed. This is an important part of your closing, as it creates clarity on what you own. Cost: $100.

A land survey is a smart choice to include as you navigate closing costs. A survey is designed to determine the boundaries of your property and to properly track your land’s value. And lenders want to know that they are giving money for a property that doesn’t come with risks. That’s what you’re paying for with a survey. Cost: between $400 and 600.

The title fees you pay during closing ensure that you own the home and property outright. A title company will search public records to make sure nobody else can lay claim to the property. You will also pay to insure the title for both your lender and you. Cost: 0.25% the total loan amount.

Remember: you need to be prepared to pay them at closing, unless your lender allows you to wrap your closing costs into your mortgage. If you’ve depleted your savings because of a down payment or due diligence cost, talk to your lender about the options that are available to you.

The Jim Allen Group provides access to information on this blog/website as a public service for educational purposes only. Although reasonable efforts have been made to ensure that all of the information made available is current, accurate, and complete…[read more]