What are Real Estate Closing Costs Made Up Of

Any time you buy or refinance a house there’s a litany of expenses that go with it.

There are many “hands” in the soup that is a real estate transaction, and each one of them demands some money to do what they do.

If you’ve ever wondered what those charges mean, here’s some inspiration…

What Real Estate Closing Costs are Made Up Of

Lender charges

Here’s a not so well-kept secret: mortgage “lenders” aren’t direct lenders, but middlemen who arrange mortgages then sell them to Fannie Mae, Freddie Mac, or Ginnie Mae.  In the process, there’s a fee for nearly everything they do.

Here are the more typical ones:

Lender origination fee.  This is the fee you will pay to your lender for handling your loan—your lender’s primary compensation.  It is usually expressed as a percentage of your loan amount, and is typically one percent.

Loan discount fee.  Borrowers will often decide to lower their interest rates, and can do so with a loan discount fee, also expressed as a percentage of the mortgage amount.  The actual amount varies depending on how low you want the rate to be.  This fee can—and usually is—zero, since it’s not usually worth the price of paying extra points for a lower rate.

Appraisal fee.  This is the fee paid to the lender’s appraiser, who’s services are used to determine an objective value for the home.  It’s usually anywhere from $200 to $500.

Credit report.  This fee pays for the credit report and any credit supplements ordered by the lender in the process of making the loan.  It’s usually a few dollars.

Flood certification fee.  Every time a new loan is taken on a property, a lender must obtain a 100 year flood certification indicating if the property is located in a flood zone.  If it is, you will need to obtain flood insurance.  The fee for the certification is usually in the range of $20.  (Flood insurance will be a separate cost if you need it.  It’s a good idea to find out if your prospective home is in a flood area before you go through the buying process.)

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Miscellaneous lender fees.  These can include a host of minor fees, such as a tax service fee, wire transfer fee, appraisal review fee, mailing fees, all depending on the state you live in and the lender you’re working with.

Title charges

real estate closing costs

Real estate closing costs can be very confusing, especially when you’re so close to getting your home.

In addition to lender fees, there are also title charges.

Any time a property changes hands, whether through purchase or refinance, evidence of a clear title must be produced.  These are important because you and the bank don’t want any surprises and find out there’s a lien or even another owner attached to the property.

Here’s what it will cost you to make that happen.

Attorney fees.  This will be the fee paid to the attorney for handling the loan closing and related documents.  This will vary by location, and in some states the attorney function is handled by a title company, with a different set of fees.

Title search.  Any new loan requires a title search to determine if there are any liens—recorded or otherwise—against the property.  Typical charge for this is around $200.

Lender’s title insurance.  There is a possibility that there will be a lien against a property that goes undetected in the title search.  The lender will require that lender’s title insurance policy be taken to cover them in the event that happens. You will pay for it, and it will usually cost a few hundred dollars (but it can be more) and varies by location.

Owner’s title insurance.  In the event of an unrecorded lien, the lender’s title policy will cover the lender, but you will have to wait until the lien is satisfied by the lender’s title insurance company if you want to sell the property or refinance it.  That can take as long as a year.  If you purchase an owner’s title insurance policy you won’t have to wait.  The cost a couple of hundred dollars, its totally optional, but well worth having.

Miscellaneous title fees.  Once again, here is where we see a wide range of small fees related to title and attorney expenses.

Government fees

Have you ever heard of “hidden taxes?”  You’ll find some of them on hidden right on your mortgage closing statement, in the various forms they take.  Be aware that the range of charges here can vary substantially from one jurisdiction to another.

Recording fees.  In order for a mortgage to be legal, it must be recorded at the county courthouse.  Fees for this can range from a few dollars up to many hundreds, depending on the jurisdiction you live in.

City or county tax stamps.  Cities and counties have all sorts of ways to raise money, and “mortgage stamps” are one of them.  They can be anywhere from a few hundred dollars to several thousand depending on where you live.

State tax stamps.  Ditto all of the above, only these are paid to the state.

Any other fees required to be paid to government authorities in connection with a real estate transaction.  You might see something here in connection with special recordings, such as a quitclaim deed to remove and ex-spouse from a title.

Prepaid expenses

Technically speaking, these are not considered closing costs since they’re actually escrows established to make sure your taxes and insurance are paid on time.  From a practical standpoint however, they will look and feel like closing costs, and you’ll pay them in the same way—at the closing table.  For that reason, let’s add them to the discussion.

Hazard insurance reserves.  Lenders typically require a paid up policy for one full year, plus the first few months.  This enables them to make sure that the property is always fully insured.  Hazard insurance (a.k.a., “homeowners insurance”) varies by location, so this charge can be a few hundred dollars, or a few thousand.

Mortgage insurance reserves.  Lenders typically require that two or three months mortgage insurance premiums are collected in advance to ensure a smooth payment.  This can vary depending on your monthly mortgage insurance premium.

Property tax reserves.  Lenders will typically escrow anywhere from a couple of months to a year or more of property taxes.  How much this will be depends entirely on taxes in your area and the collection frequency in your jurisdiction.  No matter how it’s done, it’s usually equal to a few thousand dollars.

Reserves for special assessments.  Sometimes municipalities or counties have special assessments for new sewage systems, road re-pavements and such, and will collect for these in advance.  They’re fairly rare, but when they occur they can be substantial.

Finally

If your head is spinning from all these charges, it points to the moral of this story: real estate transactions—whether for purchases or refinances—aren’t cheap!  

Hopefully this helps you better understand your real estate closing costs.  It should also help you question any fees you don’t understand or think are being unfairly charged.

Did you see something like this when you last bought or refinanced your house?

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Published or updated November 5, 2012.

Comments

  1. It can get very complicated. This is a good breakdown and very useful. I know that back when we did our loan in 2007, the lender gave us a one-cost quote that included everything. I don’t think they can actually do that anymore with the regulations, but it was definitely nicer seeing that one item versus the line after line of charges that you see now.

  2. Many people choose to roll these costs into the mortgage. It seems less painful when these charges are baked into the monthly payment, and they look much smaller also.

    The problem with this approach is that people then are tempted to refinance too frequently, which makes the true closing costs explode. The closing costs are charged yet another time, while the original set of closing costs are still unpaid.

    Most mortgage interest is paid during the beginning of the loan, and only a tiny fraction of these costs are retired in the beginning years.

  3. I was shocked by the number of fees but I made sure I understood it all before closing on my first house a bit over a year ago. Great guide for those who haven’t been through the process yet.

  4. Jenna, Adaptu Community Manager says:

    I was blown away by the number of fees. Plus, when you follow that up with a remodel and permits, it’s just ridiculous!

  5. Some fees are negotiable. And not all lenders charge an origination fee. It’s worth shopping around before assuming every lender will charge the same.

    I’ve seen closing cost estimates that differed by thousands of dollars for the same loan. Unfortunately, many people are so stressed out and confused by the process they don’t look for the best deal.

    • Agreed. We should take the time and shop our loans. But with everything that goes on in a move I think most people don’t.

      Still, it’s good to know that all fees are not equal and we have choices.

  6. All the fee are just a mess and overcharged to the 10th degree in my opinion. The sad thing is most people have no idea what they are reading. Just like with the loan docs themself. People kinda just go with it initialing here and there and reach their hands out for the keys.

  7. Thanks for the concise list of fees and charges. It helps to know going into a loan what you will have to include in your head and in your wallet!

  8. It’s really shocking to see so many charges. It is really necessary to think twice before getting a house even though, it’s a good investment in the long run. I just hope that there is a way to lessen all of those additional fees and expenses.

  9. This is a good summary, but it’s been my experience (I’m buying a house right now) that title insurance can be quite a bit more expensive than a few hundred dollars. Plus, buyers should know that there are different levels of coverage available for the owner’s title insurance. See what the title company offers, get an explanation of the what’s covered if they offer different levels of coverage, and make an informed choice. One last thing: in some states the seller pays for the new owner’s policy; in others the buyer has to pay for the owner’s policy. We sold a house in a state where the sellers have to pay for the owner’s policy and bought in a state where the buyers have to pay. We had to pay for the owner’s policy in both cases. Ugh!

  10. That is interesting. I never really thought about what the closing costs were made up of, but I always thought the appraising was paid for upfront. I guess I am wrong on this?

  11. Nice post. This can be confusing for buyers so breaking it down is probably very helpful for most people.

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