What Are My Closing Costs as a Buyer?

Closing, Miscellaneous, Mortgage, Preparation for Closing, Title

How much are my closing costs going to be?  This is a question asked by every home buyer.

As a baseline estimate, you can expect to pay an amount equal to 2-3% of your home’s purchase price in closing costs.  So a home with a purchase price of $500,000 will have estimated closing costs of $12,500 and a home with a purchase price of $1 million will have estimated closing costs closer to $25,000.

It’s important to note that “closing costs” are the out of pocket expenses or fees outside of the purchase price, which must be paid by you at closing in order to complete your real estate transaction.

This is different from prepaid items or “prepaids,” which are also paid out of pocket at closing, but which are not “fees” charged to you but rather, advance payments made on future recurring costs associated with your new home (for example, the interest due on your mortgage loan for the remainder of the month in which you’re closing).

An “initial escrow” payment will also be collected from you at closing to fund the escrow account which your lender will establish on your behalf for the purpose of paying your annual homeowner’s insurance premiums and property taxes going forward, for the life of the loan.

You will likely have some “adjustments” to make at closing, as well.  You’ll need to pay your pro rata share of any amounts the seller has already paid with respect to property taxes, municipal utilities and HOA dues (if applicable).

Closing costs include your loan origination fee and other loan costs, the appraisal fee, the lender’s and owner’s title insurance premiums, related title search and examination fees, settlement charges, administrative fees, recording fees, the cost of your survey (if you ordered one), and attorney’s fees.

You should think of your home closing costs as falling into three main buckets:

  1. Loan costs
  2. Title costs
  3. Other costs

Loan Costs

Loan costs are the fees and charges associated with your loan, as determined by your specific lender.  They include your loan origination fee, any discount points you might be paying, the appraisal fee (often paid by you in advance of closing, but still a closing cost nonetheless), and other various lender administrative fees – some examples may include a credit report fee, flood certification fee, tax service fee, etc.

Origination Fee:  Sometimes referred to as the commitment fee or processing fee – this is the service fee your lender charges for reviewing your loan application and processing your loan.  The amount of this fee usually falls somewhere between 0.25% and 1% of your loan amount.

Discount Points:  Points, mortgage points or discount points all mean the same thing – a fee charged by the lender for reducing your interest rate.  You are essentially making a lump sum interest payment at closing in order to “buy down your rate.”  A lower interest rate means lower monthly payments, so this can be a useful money-saving tool, especially if you intend to stay in this home for the long haul.

Quick Tip:  If you keep the same mortgage past the “break-even” point then it makes sense to buy down the rate, but if you sell the property or refinance before that point, then it’s not worth it because you end up losing money.  Consider putting the extra money towards increasing your down payment instead.  Your break-even point is the moment when your accumulated monthly savings due to the lower rate equals the upfront fee you paid.  In most cases, buying one point will cost you 1% of your mortgage amount and will reduce your interest rate by .25%.  So, for example, if you are getting a $500,000 thirty year fixed-rate mortgage with an interest rate of 3.75%, you could pay $5,000 at closing to reduce your rate to 3.5%.  You’ll save about $70 each month on your mortgage payment and you’ll reach your break-even point in just under 6 years.

Appraisal Fee:  This is the fee paid to the appraiser who will review the interior and exterior of the home and make an independent assessment of the value of the property.  Your lender will often require that you pay the fee prior to the appraisal, but other times, you can pay it at the closing itself.  An appraisal will run on average anywhere from $300-$500.

Credit Report Fee:  This is the cost of running your credit and is nominal – usually less than $20.

Flood Certification Fee:  This is the cost of determining whether the property is located in a flood hazard zone for which flood insurance would be required.  It’s a small fee, sometimes as low as $5.

Tax Service Fee:  Your lender will hire a third party tax monitoring service to ensure that there are no back taxes owed and property tax payments are being made on time, so as to avoid potential tax liens.  The average cost for this service can range from $60-$90.

Title Costs

Title costs are the fees and charges associated with the title search of the property and the resulting title insurance policies covering your and your lender’s respective interests in the property.  One of those costs will be the “settlement fee” charged by the title company (sometimes also referred to as a closing fee or escrow fee), and your survey fee is also often lumped into your overall title costs.

Lender’s Title Insurance Policy:  You are required by your lender to purchase a lender’s title insurance policy to protect the lender against defects in title that could affect their claim to your property.  You pay a one-time premium at closing for the policy.  Title insurance rates are strictly regulated by the state and calculated using a rate schedule determined by the NJ Division of Banking and Insurance (NJDOBI).  So, policy premiums will not vary between title companies.  Based on that rate schedule, if your loan amount is $500,000, for example, your lender’s title insurance policy premium will be $1,700, and if your loan amount is $750,000, you can expect the lender’s policy premium to be $2,925.

Other Title Costs:  These include title examination and search fees, courier, mailing, wire transfer, document fees and a variety of other service-related admin charges.  For example, you might be charged $10 (for a “closing processing fee”), $25 (for an “e-filing fee”), $30 (for a “notary fee”), $40 (for an “internet closing fee”), $50 (for a “recording service fee”), and all of these charges together will eventually add up to several hundred dollars in additional title costs.

Settlement Fee:  This is an additional fee charged by the title company to act as the settlement agent in your transaction.  The settlement agent handles the back and forth preparation and revision with your lender of your final settlement statement (Closing Disclosure or CD); ensures that all documents are properly signed and delivered to the necessary parties at the closing; manages the disbursements or exchange and payment of funds between all parties and service providers involved in the transaction; and is responsible for other post-closing tasks, such as recording your Deed and Mortgage.  You can expect to pay $475-$600 for your settlement fee.

Survey Fee:  This is a flat rate fee charged by your surveyor – it depends on the size and scope of the property being surveyed, but the average cost of a new survey is $600-$900.

Other Costs

The “Other Costs” category of closing costs includes all fees other than loan and title fees, such as the recording fees charged for recording both your Deed and your Mortgage at the county clerk’s office; amounts you have to pre-pay under your mortgageand initial escrow payment, your owner’s title insurance policy premium; the legal fee charged by your attorney; and possibly some additional fees if you are purchasing a condo or townhome, as well as the “mansion tax” (if applicable).

Recording Fees:  Your Deed and Mortgage will be recorded by your settlement agent (usually the title company) after you close.  These documents are recorded at the county clerk’s office in the county in which your property is located.  The effect of recording these documents is to put the world on notice that you are the new owner of the property and that your lender has a lien on the property.  Recording fees are charged on a per page basis and vary depending on the county.  You can find exact figures online via the county clerk websites.  Typically, recording fees will be in the ballpark of $200-$400.

Prepaids:  “Prepaids” are payments that you must make at the Closing for specific costs associated with your home ownership, even though those costs have not yet become due. The standard prepaids are:

  • the entire first year’s premium for your homeowner’s insurance policy (“HOI”);
  • the interest on your mortgage that you owe for the remainder of the month in which you are closing; and
  • the next quarterly property tax payment to become due after the Closing.

Note that your mortgage is paid “in arrears,” or “after the fact.” This means the mortgage payment you make each month covers the interest accrued over the course of the prior month (and a portion of the mortgage principal, of course). At the Closing, when you pay your mortgage interest for the remainder of the current month, you have in effect made your first mortgage payment in advance of it coming due (hence that payment at Closing referred to as a “prepaid” item).  Thereafter, your next mortgage payment will be due on the first day of the two months after you close making it feel as though you skipped a monthly payment in between when in reality you didn’t.

Initial Escrow Payment:  The initial escrow payment includes 2-3 months’ worth of homeowner’s insurance payments and 2-3 months’ worth of property tax payments.  The amounts you pay at closing are used to fund your escrow account with enough of a starting balance, so that sufficient funds are available to cover your next tax and insurance payments as they come due.  The initial payment may differ from what you pay monthly to continue to maintain your escrow account.  Lenders have a security interest in your property – missed tax payments can result in a tax lien, missed homeowner’s insurance payments can result in a loss of coverage – and both would negatively impact lender’s interest.  Lenders always want to protect their access to collateral in the event of borrower default, so they take control of ensuring that these payments are made in full and on time.

Aggregate Adjustment:  The amount that your lender can hold in your escrow account is regulated by law and cannot exceed one-sixth of your annual property tax and homeowner’s insurance payments at any given time.  So, if your initial escrow payment based on collecting 2-3 months of property tax payments and 2-3 months of HOI payments exceeds that established threshold, the difference (no matter how small or large) must be refunded to you at closing.

Owner’s Title Insurance:  When you purchase the required lender’s title insurance policy, you will have the option to purchase a separate owner’s title insurance policy which names you as the insured and which protects you (as opposed to the lender).  When purchased together with a lender’s policy, your owner’s policy costs significantly less than what it would cost to purchase just an owner’s policy alone.  This is because you benefit from what is called a “dual-issue” or simultaneous issue rate.

Quick Tip:  To calculate the cost of your lender’s title policy, you multiply the face amount of the policy (equal to the loan amount) and the standard NJ underwriting rate as determined by NJDOBI.  To calculate the cost of a standalone owner’s title policy you would perform the same calculation (but the face amount of the policy would be the purchase price).  With a dual issue owner’s policy, however, you take the full owner’s title insurance premium, add the simultaneous issuance premium for the lender’s policy coverage, and then subtract the full premium for lender’s coverage, to determine the discounted cost.

Legal Fee:  In New Jersey home closings, this will almost always be a flat rate fee charged by your attorney for representing you from contract to closing.  You can generally expect to pay between $1,000 and $2,000.

Condo or HOA Fees:  If you are buying a condo or townhome, you will also incur additional service fees charged by your condo or homeowner’s association.  Fees will be charges for preparing a “statement of account” relating to the unit you are purchasing, which is required by your lender for preparation of your CD and to make adjustments as between you and the seller.  Almost all condo and homeowners’ associations will require that new owners make an initial, non-refundable capital contribution to the association, as well as pay a portion (1-3 months’ worth) of the association dues or fees upfront at the closing.  The capital contribution is used to fund the association’s reserve accounts – funds used for emergency and ongoing repairs and maintenance of common areas, as well as, snow removal, paving, landscaping, and to defray the many other administrative costs that are required to keep the association running smoothly.  Additional fees may also be charged for providing you or your attorney with copies of the association’s governing documents and rules and regulations for review.

Mansion Tax:  Enacted in 2004, by the NJ State Legislature – it imposes a 1% fee on buyers in transfers of residential real estate if the consideration (price paid) as stated in the Deed is in excess of $1 million.  The mansion tax is imposed on the buyer, but parties are free to negotiate to have the seller pay all or a portion of the amount owed.  The tax applies to single family homes, townhomes, condos and co-ops.

Note also that some costs are incurred prior to closing, but will still need to be considered in your overall closing costs equation.  The cost of your inspections is a prime example.  Your inspections should include a general home inspection, wood destroying insect inspection, radon test, and tank sweep for underground oil storage tanks, at a minimum.  Additional inspections (asbestos, mold, septic, chimney, etc.) will obviously add to that cost.  The amount you can expect to pay for the four main parts of your inspection is $800-$1200.

Seller, of course, has its own costs to take care of that you don’t have to worry too much about, but just so you are aware, here’s a high level snapshot:  Seller pays its pro rata share of any property taxes, municipal utilities and condo or homeowner association dues (if applicable), as well as the realtors’ commissions, which will typically be the seller’s biggest ticket item (oftentimes, 6% of the sale price), and the NJ realty transfer fee, which is a tax imposed on the seller whenever a piece real estate is sold in the state of NJ – the amount of the tax is calculated on a rising scale depending on the sale price.

The Loan Estimate you received from your lender will be a good starting point to identify how much you can expect to pay in closing costs – remember that as the name entails, it’s just an estimate.  You can also ask your attorney to request a separate estimate from the title company, which will outline pretty accurately what your title costs will be.

Sometimes a credit as between you and the seller is negotiated.  A credit for inspection-related repairs and requests is a common one.  Lenders may offer some closing credits, as well.  Any credits you receive are applied against and can reduce the total amount of your closing costs.

Costs will continue to become clearer as the process moves forward, so remain patient.  In the meantime, you can use the baseline estimate of 2-3% of your purchase price as a starting point, along with the Loan Estimate from your lender, which, by the way, can’t be too far off from your final closing cost figures (as mandated by federal regulations), the title cost estimate, known amounts that need to be paid to service providers (appraiser, inspector, surveyor, lawyer, etc.), and the representative samples provided below.

Final costs to the last dollar and cent will usually not be revealed until you receive your final CD, which can be at the tail end of the transaction, just days prior to your closing date.

The table below provides a representative sampling of closing costs across four different transactions and price points (using real world estimates rounded to the nearest dollar for ease of reference).  It is important to remember that closing costs are tied to the specifics of each individual transaction and not every type of cost can be accounted for in every transaction.