Closing costs include the various loan, title and insurance fees that a buyer pays in a transaction.
There is no fixed amount for closing costs, but they generally total one- to two percent of the purchase price. For example, I recently spoke with Karen McDowell at Citibank for her take on things. For a purchase of $1M – $1.5M, Karen typically tells clients to budget $10,000 for closing cost totals, excluding points. And as the purchase price goes up, she increases that total to $15,000. Costs will increase once you hit the $3M threshold; it’s best to pull your escrow officer in to estimate those costs.
Here’s a rundown on the major types of closing costs you’ll see when you buy your home:
Title insurance. There are two policies you will be purchasing: One for the lender, which is required if you’re getting a loan, and one for yourself as the owner. Title insurance basically protects you in the event that someone makes an ownership claim on the property in the future, or a lien against the house pops up. This is one of the more expensive closing costs; a recent transaction for $1.3M that I closed specified a total of approximately $1,600 for lender’s title insurance, and $2,874 for the owner’s policy. Here’s more on why you will want title insurance.
Appraisal fee. The lender will require that an independent appraiser verifies that the value of the property is worth what you’re paying. The buyer typically pays for the appraisal.
Pro-rated property taxes and HOA dues. The escrow officer will calculate how much you’ll pay toward property taxes within the current tax period based on when you take ownership. Same goes for HOA dues; you’ll pay from the day you close to the end of a given month; the seller doesn’t pick up the tab just because he or she has already paid current property taxes or dues.
Insurance. If you’re buying a condo, you’ll probably be buying what’s called HO-6/walls-in coverage, which is several hundred dollars per year.
Private mortgage insurance (PMI). If you’re putting less than 20% down, lenders may require PMI. You’ll pay an agreed upon monthly fee until your loan-to-value (LTV) ratio hits 80%.
Escrow fees. These range from couriers to deed recording, to notary services and the actual fee the title company charges for its services.