Closing costs are the charges that purchasers and sellers typically incur in order to complete a real estate transaction, in addition to the property’s price. Loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges are all examples of these expenditures.
Within three days of receiving a house loan application, the lender is obligated by law to provide these charges on a loan estimate form. Closing expenses may apply to gifts of equity (real estate transactions to a relative or close friend at a below-market price).
How Much Are Closing Costs?
Closing fees are incurred when a property’s title is transferred from the seller to the buyer. The entire monetary amount of closing charges varies depending on the area and the property’s valuation. Homebuyers typically spend between 2% and 5% of the purchase price in closing expenses. Lenders are required by law to offer a loan estimate that includes the transaction’s closing fees.
They are required to submit this information within three days of receiving the borrower’s loan application under the federal Real Estate Settlement Procedures Act (RESPA). The lender must also submit a closing disclosure statement describing all closing fees at least three days prior to the closing. The fees listed may differ from the loan estimate.
What Do Closing Costs Include?
The loan estimate and closing disclosure will detail all of the closing fees. Here are some of the most common costs you’ll experience:
The lender will charge you a fee to handle your mortgage application. Before applying for a mortgage, check about the lender’s policies.
A real estate attorney charges a fee to design and evaluate property purchase agreements and contracts. A real estate transaction does not have to be handled by an attorney in every state.
This cost, which is sometimes known as an escrow fee, is paid to the party in charge of the closing: the title firm, escrow business, or attorney, depending on state law.
If you’re signing paper documents, this charge will help speed up their delivery. You might not have to pay this fee if the closing is done digitally.
Credit report fee
A fee is charged ($15 to $30) by a lender to get your credit reports from the three major credit agencies. Because they receive a discount from the credit reporting agencies, certain lenders may not charge this cost.
At closing, some lenders demand you to put two months’ worth of property tax and mortgage insurance payments into an escrow account.
Flood determination and monitoring fee
This is a fee paid to a flood inspector who is certified. The role of the inspector is to evaluate whether the property is in a flood zone and so requires flood insurance (separate from your homeowner’s insurance policy). Continuous monitoring of changes in the property’s flood status is included as part of the price.
Homeowner association transfer fee
You may be obliged to join a homeowner association (HOA) if you purchase a condominium, townhouse, or property in a planned development. This charge covers the costs of transferring ownership, such as paperwork updates. You should double-check if the charge is paid by the seller or the buyer before signing the contract. A copy of the HOA’s financial statements, notifications, and minutes should be provided by the seller, along with paperwork showing HOAdue amounts.
At closing, a lender will normally want proof that you’ve paid your first year’s homeowner’s insurance premium.
Lead-based paint inspection
This is a cost paid to a professional inspector to assess if the property contains lead-based paint that is hazardous to health.
Lender’s title insurance
The lender is protected by an upfront, one-time charge paid to the title business if an ownership dispute or lien emerges that was not discovered during the title search.
This fee is normally 1% of the loan amount and pays the lender’s administrative costs in processing your loan. To cover these costs, some lenders do not impose origination fees and instead charge a higher interest rate.
Owner’s title insurance
This coverage safeguards you in the event that your home’s ownership is challenged. It is normally optional, but legal experts strongly advise it.
This is a one-time fee that covers the cost of a professional pest inspection to check for termites, dry rot, or other damage. An inspection is required in some states and for some government-insured loans.
Points (or discount points) are an optional advance payment to the lender that lowers your monthly payment by lowering the interest rate on your loan. A point is equal to 1% of the loan amount. Paying points may not save you any money at a time when mortgage interest rates are already low.
Prepaid daily interest charges
A payment to cover any interest that will accumulate on your mortgage from the time you close until your first payment is due.
Special Considerations: Mortgages With No Closing Costs
Many, but not all, fees for the buyer at closing are eliminated with no-closing-cost mortgages. If you’re short on funds, these mortgages can help in the short term, but they normally come with higher interest rates. Your lender may offer to incorporate your closing expenses into your mortgage, but this may increase your loan balance and require you to pay interest on those charges.
Are you looking to make your first (or next) real estate purchase? We employ innovative AI technology at BuyProperly to assist match investors with attractive investment options. We use a fractional ownership concept, which means you can get started for as low as $2500 (and expect yearly profits of 10-40%). BuyProperly’s methodology makes it simple to diversify your investment portfolio and grow wealth by allowing you to invest in multiple properties and locations. Do you want to know more? Pay us a visit at buyproperly.ca/properties.
Related Topics to Closing Costs:
- Flipping vs Renting: Which Strategy is Better for Real Estate Investors?
- How to Choose an Investment Property: A Step-by-Step Guide
- The Pros and Cons of Investing in Single-Family Homes
- Investment and Wealth Basics: Real Estate edition
- Millennials struggle to chase Real Estate dreams using traditional investment options