A Guide to Closing Costs

Are you on the verge of closing the deal on your dream home? Congratulations on this exciting milestone. But before you can pop the champagne and celebrate, there's something you should be aware of. We’re talking about closing costs. 

If you have experience in real estate transactions, then you might be familiar with all this stuff. Or maybe you just know closing costs are something you have to pay, and haven’t thought about the individual fees. 

For first time buyers, sometimes these additional expenditures can seemingly come out of nowhere. Sure, you’ve heard of closing costs. And you know you’ll be paying more than just your down payment when it comes time to finalize the deal. But just how much you’ll wind up paying, and for what, may sometimes come as a bit of a shock. 

No matter your situation, at A Cole Realty we know the importance of understanding where your money is going. And that’s why we’ve put this comprehensive guide together. Our goal is to take the mystery out of closing costs. That way, when it’s time to close, you’ll be equipped for this critical part of the home buying process.  

So, without further ado, here’s our guide to closing costs.

An Overview of Closing Costs

Before we break down each individual closing cost, let’s get a general idea of what they are as a whole. We’ll also briefly talk about why they matter.

What are closing costs?

Closing costs are the various fees and expenses that buyers and sellers pay when transferring ownership of a property. As the name suggests, they’re paid at the closing, which is the final stage of the home buying process.

Why are closing costs important?

Closing costs play a significant role in the overall cost of purchasing a home. That’s why it’s so crucial to understand them. This way you can avoid any surprises and be financially prepared.

Types of Closing Costs

Closing costs can be categorized into different types based on the services provided and who’s involved. Let's take a closer look at each type. 

Lender Fees

Lender fees are the charges that get paid to, you guessed it, the mortgage lender. They typically cover the administrative costs associated with processing and approving your loan. Some common lender fees include:

  • Origination Fee: The origination fee is the cost charged by the lender for processing the loan application. It is usually a percentage of the loan amount.
  • Discount Points: Discount points are optional fees paid upfront to lower the interest rate on your mortgage. Each point typically costs 1% of the loan amount and can result in long-term savings.
  • Appraisal Fee: An appraisal fee covers the cost of assessing the property’s value, ensuring it aligns with the loan amount. It protects both the buyer and the lender.
  • Credit Report Fee: The credit report fee covers the cost of pulling and reviewing your credit report. Lenders use your credit history and other information to assess your creditworthiness.

Title Fees

Title fees are what get paid to transfer ownership and make sure the title to the property is clear. They’re usually paid to a title company and include:

  • Title Search and Insurance: A title search is done to make sure that the title is clear from liens or claims. Title insurance protects you against any issues that could happen in the future.
  • Settlement Fee: The settlement fee covers administrative tasks that go along with finalizing the transaction. It’s either paid to the title company or attorney responsible for handling the closing. 
  • Survey Fee: If the property requires a new survey then a survey fee will be charged. The survey ensures that the property’s boundaries are correct and in line with the legal descriptions. 

Government Fees

While government fees probably seem self explanatory, more specifically they refer to the ones charged by local and state agencies. The most common government fees include:

  • Recording Fees: Recording fees are charged by the county clerk's office to record the new deed and other legal documents.
  • Transfer Taxes: Transfer taxes are imposed by state and local governments when transferring the property's ownership. The amount varies based on the property value and location. In North Carolina, the state charges $1 for every $500 of the sale price.
  • Property Taxes: Property taxes are also collected at closing. Both the buyer and seller pay their share, which is prorated based on the date of the property transfer. 

Escrow Fees

Escrow fees are related to services provided by an escrow company. Escrow companies act as neutral third parties,making sure all funds and documents are handled securely during the closing process. 

We’ll mention that there’s a popular misconception that escrow companies and title companies are always the same thing. They’re not, but some title companies do offer escrow services. Having one company handle everything can be beneficial for ensuring a smooth transaction.  

Here are some common escrow fees:

  • Escrow Deposit: An escrow deposit, or earnest money, is an upfront payment made to the escrow company. It demonstrates the buyer's commitment to the transaction and covers the initial costs associated with setting up the escrow account.
  • Attorney Fees: In some states, it’s common to involve an attorney in the closing process. Attorney fees cover the legal representation and advice provided by the attorney.
  • Notary Fees: Notary fees are charged for the notarization of important documents during the closing process. Notaries serve as impartial witnesses and validate the authenticity of signatures.

Managing Prepaid Expenses

Prepaid expenses are an important aspect of closing costs. Let's take a closer look:

  • Property Insurance: Lenders often require borrowers to prepay a portion of their homeowners' insurance premium at closing. If you need to buy flood insurance, that could also be included. This ensures that the property is adequately insured from the moment of ownership transfer. The prepaid amount is held in an escrow account and used to pay the insurance premium when it becomes due.
  • Homeowners Association Fees: If the house is part of an HOA you may have to prepay the HOA fees at closing. They’re typically prorated based on the date of the sale. HOA fees cover maintenance and management of common areas and shared amenities. It's important to review the HOA rules and budget to understand the ongoing fees.
  • Mortgage Interest: Borrowers typically prepay the mortgage interest for the remaining days in the month of closing. This is to make sure that the first regular mortgage payment is due in the following month. The prepaid interest amount varies based on the loan amount, interest rate, and closing date.

Tips for Reducing Closing Costs

It’s important to remember that not all closing costs are set in stone. Here are some tips to help you potentially reduce your closing costs:

  • Request a Loan Estimate: Lenders must provide you with a Loan Estimate (LE) within three business days of receiving your application. The LE itemizes the estimated closing costs associated with your loan. Review the document carefully and ask your lender to explain any fees or charges that you don't understand.
  • Compare Quotes: Don't be afraid to shop around and compare quotes from different lenders and service providers. Request quotes that include all the fees and charges associated with the closing process. This will help you identify any significant differences and make an informed decision.
  • Negotiate with the Seller: In some cases, buyers can negotiate with the seller to cover a portion of the closing costs. Of course, not all sellers are willing to provide concessions, but it’s worth asking. It can be a valuable tool to reduce your upfront expenses. Work with your real estate agent to assess the feasibility of negotiating closing costs with the seller.
  • Research Assistance Programs: There are various assistance programs available to help homebuyers with their closing costs. Research federal, state, and local programs that offer grants, loans, or other forms of financial assistance. These programs can provide valuable support and help reduce your financial burden.

The Impact of Closing Costs

Closing costs have a significant impact on your finances. Here's what you need to consider:

  • Affordability Considerations: Closing costs can add a substantial amount to the upfront expenses of buying a home. It's important to include these costs in your overall budget and ensure that you have enough funds to cover them. Failing to account for closing costs can lead to financial strain and potential delays in the closing process.
  • Long-Term Financial Planning: Closing costs are not just a one-time expense. They can affect your long-term financial plans and the overall affordability of homeownership. Take the time to evaluate how the closing costs will impact your savings, emergency fund, and other financial goals. Being aware of the long-term implications will help you make informed decisions and avoid financial hardships.

Conclusion

So, that’s it! We hope the information we’ve provided has helped you understand this aspect of homebuying a little better. 

At A Cole Realty, we know that dealing with closing costs can be overwhelming as you prepare to start your home buying journey. That's why our team of local experts are ready to support you every step of the way. We take pride in offering exceptional service to the Triangle and the surrounding areas.

Whether you're a first-time homebuyer or a budding investor, we invite you to reach out. Let us leverage our expertise to ensure a smooth and successful home buying experience for you. Remember, closing costs are just one piece of the puzzle, and with the right guidance, you can navigate them confidently. 

Contact A Cole Realty to take the next steps in finding your dream home. Together, let's turn your homeownership dreams into reality.

This guide provides a detailed overview of closing costs to equip homebuyers with an understanding and to assist them in being financially prepared.

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