The Path to Home Ownership: Understanding homeowner closing costs.

Becoming a first-time home buyer takes time, effort, patience, and persistence. It also takes a substantial amount of money, most of which goes toward a down payment (typically 20% of the purchase price). But buyers also need to factor one last thing into their budget; closing costs, which can add anywhere from 2% to 5% (and in some instances as much as 7%) to the total amount needed to purchase a home. Where a specific home will fall within that range depends on two things: location and home type. There are no consistent requirements across states, cities, and municipalities, so there’s a wide range of possibilities. A 150-year-old house within a flood plain on a coast will have different closing requirements than a recently built house situated inland in a mild climate or weather area.

Buyers can shop for certain services required for the closing process and choose the most competitive price (but do your research – sometimes cheaper can end up costing more). This can make a significant difference given the current U.S. median price of an existing home is $387,600, adding anywhere from $7,752 to $19,380 to the total cost of the home purchase.

Closing costs often amount to more than first-time buyers expect and can even surprise experienced buyers. This is because most buyers are typically focused on the price of the home and the amount they have on hand for the down payment. Lenders usually don’t ask about anticipated closing cost funding when they accept a mortgage application, and if they are mentioned at all in a real estate listing, it’s often inconspicuously displayed in a small font as an estimate at the end of the “total due at lose” section.

Don’t despair – there are options, but let’s start with the most practical step: if you’re looking at putting down 20% of a home’s price for the down payment, budget at least 25% the price for all the costs to purchase it, not 20%. This way, you won’t be suddenly panicked when the title company presents you with a list of closing costs totaling thousands of dollars you weren’t quite expecting.

However, keep in mind there are many mortgage options available today which do not require 20% down. For example, Lafayette Federal’s own portfolio ARM products permit financing up to 100% of the purchase price up to $1,000,000 with no mortgage insurance required (obviously you need excellent credit). There are also many low-down payment options that require only 3% down in the market today. These are ideal for first time buyers who want to buy now rather than wait to accumulate a larger down payment.  Finally, VA loans allow veterans to finance the entire transaction—closing costs included—in certain cases.

Closing costs go to third parties who execute the sale and transfer the title, including fees charged by lenders, title companies, insurance companies, inspectors, surveyors, local agencies, and officials. These fees do not go to the homeowner or the listing agent. Comparison shopping for services related to closing costs is a smart move; they can often be negotiated. Closing costs vary among lenders and situations. It is completely acceptable (and even recommended) to ask what is and isn’t included, what is required, and how the fees are determined.

Below are some common fees included in home closing costs for the buyer, along with some cost estimates. Remember prices and fees for these services can vary widely depending on the location, features, and size of the property.

Home Closing Costs Breakdown

• Home Inspection: Ask your agent for a comparison, and even a referral.
• Appraisal fee (Cost estimate: $500-$800).
• Discount points (Cost: One discount point equals 1% of the loan amount and typically reduces the interest rate by a quarter of a percentage point).
• Escrow account funds (Cost estimate: Varies widely).
• Flood determination and monitoring fees (Cost estimate: $50).
• Surveying fees (boundary verification)
• Government recording fees (Cost estimate: $125).
• Loan-origination charges (Cost estimate: About 1% of the loan amount – some lenders charge a flat fee. The loan origination fee covers the lender’s costs for reviewing and processing an application, including income verification, credit history, and confirmation of employment and income).
• Mortgage insurance or fees for government-backed loans (Cost depends on the loan type).
• Pest inspection (Cost estimate: $150 but can vary widely depending on environment and property).
• Prepaid expenses (Cost estimate: Varies depending on your loan amount and interest rate).
• Tax monitoring and research fees (Cost estimate: $150).
• Prepaid expenses— Including loan interest, homeowner’s insurance, and property taxes.
• PMI (Private Mortgage Insurance
• Title searches and insurance — lenders and owners need clear titles. Title insurance is required for the lender. Owner’s title insurance is optional for the buyer.
• Attorney’s fees: some states require an attorney to be present at closing, which will result in additional fees.
• Escrow fees – costs associated with the setup and management of this escrow account. Escrow accounts hold the buyer’s earnest money deposit plus funds for property taxes, insurance, and other expenses.
• Recording Fees- the lender records the mortgage with the local government. This protects the lender’s interest in the property and ensures that the mortgage is legally recognized. The fee to record the mortgage with the government is the recording fee.

Depending on the market and the seller’s situation, you may be able to negotiate having the seller assume or assist with some of the closing costs (within certain limits). This should be part of the negotiation of the sales contract. Often sellers will pay points which can help lower the interest rate of the loan for the buyer.

Consult with your agent. Sellers are also responsible for paying commissions to the buyer and seller’s agents (typically 4%-6% of the sale price), property and transfer taxes, and title insurance.