Home Buyer Closing Costs Explained

Many buyers are confused between the closing costs and the down payment. They assume that the down payment amount for the mortgage is all they need and are surprised by the total amount needed for closing costs. Although the down payment is part of the closing costs, there are many other associated costs that make up the total.

Here is a breakdown of home buyer closing costs. This step-by-step explanation will help you prepare to purchase your dream home!

1. Down Payment. The down payment you need for your mortgage makes up the largest chunk of your closing costs. Down payment amounts vary by mortgage type and can be anywhere from 3% and up. For example, if you have a $300,000 conventional mortgage with 3% down, your down payment is $9,000. This is just one piece of the closing costs.
2. Mortgage Origination Fees. Your lender will have fees associated with handling your mortgage. These fees include the credit report, document preparation, recording fees, etc.
3. Prorations to Seller. This is just a fancy way of saying you are going to pay the seller back for anything that they paid ahead. If they already paid things like the property tax and water/sewer, you will pay them back for any fees past the date of settlement.
4. Lender Escrows. An escrow account is where money is held in order to pay something at a later date. The lender pre-collects your property taxes and home owner’s insurance ahead so the money is always available when the bill comes. You will pay this upfront at closing and is part of your closing costs. Then you will see 1/12 of these amounts as part of your monthly payments as the lender is starting to collect for the next year. When your bills come, it is paid through the lenders escrow account.
5. Mortgage Insurance. Depending on the type of mortgage you qualify for, you may be required to pay upfront mortgage insurance as part of your closing costs. This is something your lender will discuss with you.
6. Title Insurance. When you purchase your home, the title company will run a title search to make sure there are no liens or issues with the title. They make sure you are receiving a clear title and then they insure your title for as long as you own the home.
7. Transfer Tax. Pennsylvania has a 2% transfer tax that is paid on the purchase price of any property that is sold. This is split between the buyer and the seller. As the buyer, you will pay the state 1% transfer tax. If you are purchasing a $300,000 home, you will pay $3000.
8. Settlement Fees. Recording your deed, preparing your documents, and writing funds are all fees you may incur in settling on your new home. These vary by settlement company, but they are minimal fees.
9. Out-of-Pocket Fees. There are several fees included in your closing costs that will need to be paid out of pocket prior to closing. Any home inspections you choose to do are paid for by the buyer at time of service. You will also pay for an appraisal when it is ordered. This is ordered shortly after you go under contract. These fees are common out-of-pocket fees you have to pay upfront.

There are a lot of items that are included in a home buyer’s closing costs! If you have any questions at all, please reach out. I am always happy to help.

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