October 6, 2023

Making Sense of Closing Costs

Austin Finch
Mortgage Banker

So you're ready to buy a house. You've found a home that costs $500k. You talked to a bank that will lend you $400k for the mortgage, so now all you owe at closing is the $100k down payment, right?? Wrong. For a real estate transaction, there are a number of fees that are owed by both the buyer and the seller, and as you prepare to buy a home, you need to be prepared and educated on what else you'll owe at closing. Here's a quick rundown.

Types of Fees to Anticipate

  • Lender Origination Fees
  • Appraisal Fee
  • Credit Report Fee
  • Title Fees
  • Recording Fees
  • Government Transfer Fees/Taxes
  • Prepaid Insurance
  • Prepaid Interest
  • Initial Escrow Payments

Going through these one at a time

Lender Origination Fees - These go by many names: origination fee, underwriting fee, processing fee, discount points, etc. Ultimately, these fees are paid directly to the lender you're working with. I like to see these fees <$1,500, unless you're paying additional discount points to buy your rate down.

Appraisal Fee - Your lender might require an appraisal, which entails paying a licensed appraiser to go by the home and determine a fair value of the property. I like to see this fee <=$500.

Credit Report Fee - Your lender will be required to obtain your credit score and a list of outstanding debts. This is done by generating a credit report. I like to see this <$150.

Title Fees - Now this is the big one. In order to close a real estate transaction, a mortgage company is going to want to make sure that the property is unencumbered by any other liens. Practically speaking, you don't want to be surprised after the closing that the seller had taken out a line of credit on the house and still owes $50,000, of which they used the house as collateral. These fees are usually the biggest chunk of the total closing costs. I like to see these fees <$2,500, however, depending on the state, closing attorney, and title company, they could be more.

Recording Fees - The city, county, and/or state in which you buy a home will need to record your real estate and mortgage transaction by way of a deed and deed of trust. To record, they charge a fee. I like to see this fee <$100.

Government Transfer Fees/Taxes - Some governments charge a real estate transfer fee or tax. In some states like Florida, Texas, Georgia, New York, California, this fee can be fairly high. However, in some states, like my home state of North Carolina, this isn't charged. If you're in a state that charges this, I like to see this number <$2,000.

Prepaid Insurance - As part of your closing costs, the lender will charge you your first year's insurance premium. You will have already picked and agreed upon an insurance policy with an insurance agent, but the lender will collect this at closing and pay it on your behalf to the insurance agent. I like to see insurance premiums <$1,500, but certain states, like Florida, have more inherent risks (i.e. hurricanes) that can make properties much more expensive to insure.

Prepaid Interest - Most people don't realize this, but your monthly payment pays interest in arrears. By this, I mean when you pay your January mortgage payment, the interest portion of that payment is paying for December's interest. Therefore, at the closing table, you will go ahead and pay for the rest of that month's interest, and this will then allow you to skip your first month's mortgage payment. Ex: Closing date is 8/15, you will pay 17 days’ worth of interest to cover the 15th-31st. Then your first mortgage payment won't be due until October 1st. The amount that you owe for this will depend on your interest rate, loan amount, and the day of the month that you close.

Initial Escrow Payments - Lastly, if you decide that you would like to include your insurance and tax payments into your monthly mortgage payment, then you will need to set up an escrow account. By doing so, every month you will pay the bank your principal + interest mortgage payment plus 1/12th of your total tax bill + insurance premium. Then at the end of the year when these bills are due, the bank pays them on your behalf. However, at closing, your lender will require you to bring a specific amount of cash in order to set up and stock up your escrow account. This amount that they will need to collect will depend on your tax and insurance bills, the month in which you close on your home, and the months in which those bills are due.

If you need help making sense of a loan estimate you've received from another lender, please reach out to one of our team members, and they'll be happy to assist you!

Go Icon