Closing Costs

Closing costs are expenses associated with the transfer of property ownership.  As a rule of thumb, these costs can range from about 4% to 8% of the cost of the home.  The following are common closing costs.

Attorney fees

In the state of Washington, an attorney is not required for closing.  Many real estate transactions close without an attorney, but in some cases you may want to be represented.  Note that real estate agents by law cannot give you legal advice.  Therefore, while you may not need an attorney for closing, it is a good idea to have an attorney you can call for answers to specific legal questions.

Lender fees (points)

These are fees that the lender charges to reduce the interest rate of a home.  A ‘point’ is typically one percent of the amount of the loan, so if you’re loan is for $300,000 then one point is $3,000.  Points can be paid either through on hand cash or by increasing the amount of the loan.

One question that many people ask is “should I pay points to lower the interest rate”?  As always, the answer is ‘it depends’.  In order to determine whether paying points is a good idea, you should calculate how long it will take you to ‘save’ the amount you paid in points on your loan.  For instance, if you pay $3,000 in points and it reduces your monthly payment by $75, then it will take 40 months before the payment in points will make sense.  Therefore, the following are cases where you may want to pay points.

ü  You plan to stay in the house for seven or more years

ü  You believe interest rates will go up or stay the same – if you refinance too soon you will lose the money you paid in points

ü  You want to use a fixed mortgage

The following are reasons why you may not want to pay points.

ü  You plan to stay in the house less than seven years

ü  You believe interest rates will go down – meaning you can refinance at a later date

ü  You want to use an adjustable rate mortgage (ARM)

Note that lenders fees, or discount points, vary from origination fees and in some circumstances may be tax deductible.  For more information on this, see a tax specialist.

Origination fees

Origination fees are charged by the loan officer to recover some costs of the loan origination process.  This is one way loan officers make money.  Not all loan officers charge origination fees but any honest loan officer will be up front on whether they exist and how much they are. 

If you hear of a ‘no points’ mortgage with a very good interest rate, always ask if there are origination fees.  If there are, you may want to reconsider the honest of the loan officer.

See the section above on points for reasons why or why not to pay origination fees.  Note that unlike points, origination fees are generally not tax deductible.  For more information about this, see a tax specialist.

Escrow fees

Escrow fees are paid to the company that manages the transfer of the house from the seller to the buyer.  In some cases they may be paid by the seller or split between the parties.  Escrow fees generally vary by the sales price of the house.  For an estimate of these fees, ask your real estate agent.

Recording fees

Recording fees are charged by the courts to record the purchase of your house in county records.  Generally recording fees should not exceed a few hundred dollars.  If you believe recording fees are in excess, contact your county courts to discover the recording fee they charge, and then ask your loan officer for an explanation of the difference.  Some lenders will add their own fees to this item.

Title insurance

Title insurance is almost always required by the lender to guarantee payment.  This is a sometimes complicated legal process that makes sure the seller has the right to sell the property in the first place.  Ask your real estate agent for an estimate on title insurance – though the actual cost will vary with the property you purchase.

Home inspection

It is recommended to always purchase a property subject to inspection, regardless of the age or type of house.  A good inspector will make you aware of potentially costly repairs.  In some cases these repairs will be significant enough to warrant concessions from the seller.

Moving expenses

Unless you plan to buy all new things you will need to move your existing things.  For more details on moving costs and an estimate, contact a moving company.

Window coverings, furniture, etc

If you are buying new construction, you will often have to purchase window coverings for your new home.  If you are moving from an apartment or a smaller home, you will likely find yourself in possession of rooms for which you do not own furniture.  Make sure to budget these into your costs, so you do not find yourself owning an empty home.