On the day when a home becomes yours officially (known as closing day), you will have to pay fees for the services of several parties. In a typical real estate deal, closing costs total 2 to 5 percent of the purchase price of the property. You shouldn't ignore them in figuring the amount of money you need to close the deal. Here are some typical closing costs (listed from those which are usually largest to those which are typically tiniest). Exact fees vary by property cost and location:
- Loan origination fees (also called 'points') and other loan charges: These fees and charges range from nothing to 3 percent of the amount borrowed. Lenders generally charge all sorts of fees for things such as appraising the property, pulling your credit report, preparing loan documents, and processing your application. You may also be charged a loan-origination fee, which may be 1 or 2 percent of the loan amount. If you're strapped for cash, you can get a loan that has few or no fees; however, such loans have substantially higher interest rates over time.
- Closing fees: Closing fees range from several hundred to over a thousand dollars, based on the purchase price of your home. These fees cover the cost of handling all the purchase-related documents and funds.
- Homeowners insurance: This insurance typically costs from several hundred to a thousand dollars plus, depending on the value of your home and how much coverage you want. You can't get a mortgage unless you prove to the lender that you have adequate homeowners insurance coverage. Lenders usually insist that you pay the first year's premium on your insurance policy at the time of the closing.
- Title insurance: This insurance typically costs from several hundred to a thousand dollars, depending on your home's purchase price. Lenders require that you purchase title insurance when you buy your home to make sure that you have clear, marketable title to the property. Title insurance protects you and the lender against the remote possibility that the person selling you the home doesn't actually legally own it.
- Property taxes: These taxes typically cost from several hundred to a couple thousand dollars and are based upon the home's purchase price and the date of closing. At closing, you may have to reimburse the sellers for any property taxes that they paid in advance. For example, suppose that (before they sold their home to you) the sellers had already paid their property taxes through June 30. If the sale closes on April 30, you owe the sellers two months' property taxes -- the tax collector won't refund the property taxes they have already paid for May and June.
- Legal fees: These fees range anywhere from nothing to hundreds of dollars. In some eastern states, lawyers are routinely involved in real estate purchases. In most states, however, lawyers are not needed for home purchases as long as the real estate agents use standard, fill-in-the-blank contracts.
- Inspections: Inspection fees can run from $200 to $500. You should never, ever consider buying a home without inspecting it. Because you're likely not a home-inspection expert, you'll surely benefit from hiring someone who inspects property as a full-time job. Sometimes, you simply pay these costs directly; at other times, you pay these costs at the closing.
- Private mortgage insurance (PMI): Should you need it, this insurance can cost you several hundred dollars. If you put less than 20 percent down on a home, many mortgage lenders require that you take out private mortgage insurance. This type of insurance protects the lender in the event that you default. At closing, you need to pay anywhere from a couple months' premiums to more than a year's premium in advance. If you can, avoid this cost by making a 20 percent down payment or by obtaining 80-10-10 financing.
- Prepaid loan interest: Lenders charge up to 30 days' interest on your loan to cover the interest that accrues from the date your loan is funded (usually one business day before the closing) up to 30 days prior to your first regularly scheduled loan payment. How much interest you actually have to pay depends on the timing of your first loan payment.
- Recording: The fee to record the deed and mortgage usually runs about $50.
- Overnight/courier fees: Fees to quickly send transaction documents usually cost $50 or less.
- Notary: Notary fees run from $10 to $20 per signature per buyer. At closing, you sign many important documents and need to have your signature verified by a notary to make it official.