Closing and Continuing Costs

Buying a home can be exciting, but it comes with major costs. First-time homebuyers may already know the relative costs of down payments or mortgage loans.

But it's important to know that extra costs, such as closing and continuing or ongoing costs, add to the total cost of your new home. These costs may include processing fees associated with services such as running your credit score or paying for a pest inspection. Borrowers must add these costs to their monthly mortgage payments, property tax payments, homeowners insurance payments, and interest charges.

This article provides a brief overview of closing and continuing costs that you should know about before committing to a home purchase.

What Are Closing Costs?

Closing costs are fees and processing charges paid to providers when securing your home loan. For example, when you take out a home equity line of credit, you pay up front for many of the same expenses as when you financed your original mortgage. Any mortgage will have a closing disclosure laying out all the costs you'll have to pay on the closing date.

Closing costs in real estate transactions include items such as:

• Loan application fees — fees charged by lenders to process loan applications
• Credit report fees — fees charged to run your credit
• Title searches — information about property ownership history, including liens
• Home appraisal fees — fees charged to assess how much a home is worth. It may include pest inspections or other home inspection fees.
• Attorney's fees — fees paid to lawyers for review work
• Recording fees — fees charged by the government to record a deed to memorialize changes in property ownership
• Transfer taxes — taxes charged by the government during the transfer of real property
• Underwriting fees — fees charged by lenders to assess risks before they lend you money
• Loan origination fees (a percentage of the loan amount you borrow; also called "points") — charged to cover the lender's administrative costs for loaning money. Sometimes banks offer discounts through prepaid points or discount points.

Remember that there may also be incident expenses, such as inspection fees, not baked into the purchase price. These expenses can add to your loan estimate, especially if you borrow little from your credit line.

Negotiate with mortgage lenders to see if they will pay for some of these expenses. You may have a limited number of business days before your closing date, so it's best to do your negotiations in advance. This can help reduce buyer closing costs and avoid surprise expenses when closing a transaction.

What Are Continuing Costs?

Besides upfront closing costs, some mortgage lenders require you to pay continuing or ongoing costs throughout the life of the loan. These may include an annual membership or participation fee, whether you use the account, or a transaction fee, which gets charged each time you borrow money.

Ongoing costs add to the loan's cost; over time, they can add up. Be aware of all possible continuing costs that can add to the total cost of your home.

HOA Payments

Some ongoing costs, such as homeowners association (HOA) monthly dues, are not paid to your mortgage lender. Your monthly mortgage payment doesn't include them. Even though such payments may affect your loan amount, they get paid directly to the HOA instead of your mortgage lender.

Property Taxes

You can negotiate on all kinds of lender fees, but you'll always have to pay property taxes. It won't matter what your credit score is or which local government you're dealing with. Property taxes will usually be a yearly percentage of your original home sale. They will also increase every year to keep up with inflation.

Some states, such as New York and California, have passed laws limiting the amount that property taxes may increase yearly. In certain situations, nonprofit organizations like churches and charities may be exempt from paying property taxes. To learn more about how to budget for property taxes and avoid surprise expenses, visit our page on property taxes and deductions.

Does a Home's Value Affect Costs?

A home's market value affects not only your property taxes but also your mortgage costs. Consider a case study for a $200,000 home. Most associated costs will be equal to a percentage of the home's value or sale price. While home value and mortgage costs vary by locality, such a home will have considerable one-time and yearly expenses.

Examples of one-time expenses for a $200,000 home:

• 2% to 5% in average closing costs for mortgages — let's estimate that to $5,000
• 0.5% to 1% in title insurance costs — around $1,000
• 1% in transfer taxes — around $2,000

Examples of yearly expenses for a $200,000 home:

• 1% to 2% in property taxes — around $3,000 per year
• A 30-year mortgage at a 7% fixed interest rate would have a monthly payment of around $1,300 — around $15,000 per year
• 1% in private mortgage insurance (PMI) — $1,000 per year

Again, costs vary across cities and states. The above figures are a general estimation. They do not include other expenses, such as maintenance and property insurance. But they give you a general idea of how expensive homeownership can be. Understanding these numbers can help you better plan and budget for a new home.

Ways to Cut Costs

While you might not be able to get out of negotiating your property taxes and transfer fees, everything else is negotiable. You can shop at different lenders for lower mortgage interest rates. You can ask different insurance agents to find a company with lower insurance premiums. Your real estate agent or Realtor might help you research reputable companies with fairer prices.

For instance, when you're shopping around, you should compare different:

• Banks, mortgage companies, credit unions, and other lenders
• Escrow account companies (for escrow fees)
• Title companies (lender's title insurance fees and title search fees)
• Real estate brokers (broker fees and real estate commissions are usually charged only to sellers)

You can also negotiate with the owner of a property to split costs. As a buyer, you can ask for seller concessions, such as credit from the seller for some of the above expenses associated with your home purchase.

Related Real Estate Resources

• What Is a Mortgage Lien?
• Mortgage and Loan Basics
• Interest Rates, Mortgage Points, and Fees
• Types of Lenders
• Home Equity Do's and Don'ts

Talk to a Real Estate Attorney Today

If you are considering homeownership, speak with someone who can help you prepare for the total cost of your new home. Real estate attorneys can help you navigate the home-buying process and provide legal advice on closing and continuing costs. Contact an experienced real estate attorney in your state today.