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    Closing Costs Explained

    We all know to save for a down payment before purchasing a home, but there are other fees involved called closing costs.  Closing costs can come as an unpleasant surprise when you purchase your home.

    Understanding and budgeting for closing costs will help smooth the transition to becoming a first-time homeowner.

    What are Closing Costs?

    Closing costs cover costs for purchasing your home such as lender fees, title company costs, state fees and other settlement fees. These fees won’t help pay your principal payment in your mortgage like a down payment.

    Closing costs are between 2-5% of your mortgage amount.  The amount will vary depending on the lender and title company you use. For example, if your mortgage is $200,000, these fees can be between $4,000 and $10,000.  That’s a big difference when you’re trying to stick to a budget.

    Types of Closing Costs

    Lender Fees

    The following lender fees will vary on your mortgage type, the lender, and your finances. I’ve included some estimates to help you get an idea of what will be due.

    To obtain fee estimates, you can contact local banks like OceanFirst and Republic Bank or large banks like Bank of America, BB&T or Well’s Fargo. Credit unions also supply mortgages like Jersey Shore Federal Credit Union and South Jersey Federal Credit Union. Local mortgage brokers can also send you their fee estimates.

    Application Fee:

    This is the cost of processing your request for a new loan, which covers administrative costs.  The fee can also include costs such as credit checks so be sure to check with your lender to see what is included.

    Origination Fee:

    Also known as an underwriting fee, processing fee or administrative fee. The lender receives this fee for evaluating and preparing your loan. Fees include document preparation, notary fees, and lender’s attorney fees. (~ 0.5% of the loan)

    Credit Report:

    Besides running your credit when you apply for a loan, your lender will check your credit again as you get closer to settlement. This is to be sure you didn’t make any large purchases or miss payments that could affect your eligibility for your mortgage. (~$20)

    Appraisal:

    The appraisal is to protect the lender from giving you a loan for more than the value of your home. The appraisal is completed by a 3rd party service that determines the market value of your home. (~$400-500)

    Survey:

    The survey shows the boundaries of your property. Your property size and type will have a weight on the price. (Min $400)

    Prepaid Interest:

    Interest is paid in arrears. This means that when you make your first mortgage payment in, for example September, you’re paying interest that accumulated in August. You’re paying for something you already received, unlike a rent payment that you pay for on the 1st of the month to cover that month.

    For prepaid interest, lenders charge interest upfront for the days between your settlement date to the end of the month. In this case, if your settlement date is July 12, the lender will charge prepaid interest from July 12 to July 31 at settlement. Your first mortgage payment won’t be until September and will cover the interest accrued from August 1 to August 31.

    Points:

    Also referred to as discount points. This fee is paid upfront to reduce your interest rate over the life of your loan. 1 point equals 1%. Points can help lower the total cost of your mortgage when you keep your home for a longer time. If you plan to move more quickly, points lose their benefit.

    Flood Certificate:

    This informs lenders if your property is in a flood zone. If so, you’ll also need flood insurance. (~$15)

    Mortgage Insurance:

    Mortgage insurance protects the lenders, not the homeowner.

    If your down payment is less than 20% of your purchase price, you’ll pay private mortgage insurance (PMI).  You’ll also pay an application fee to get the insurance.

    If you get an FHA loan, you’ll be paying mortgage insurance until your loan is paid.

    Applicable to VA Loans, the Funding Fee is to ensure that future veterans have access to VA Loans in the case that you default on your loan. Also called VA Funding fee.

    Title Company Fees

    The buyer generally chooses the title company, and fees will vary from company to company.  Some of the title companies in the south jersey area include Landis Title, World Title, Surety Title, and Foundation Title.

    Title Search:

    The title company will ensure that the sellers have the right to sell the home and don’t owe anything that could affect your future homeownership. This will alert the title company that the sellers owe claims or liens against the property, such as back property taxes. (~$200)

    Lender’s and Homeowner’s Title Insurance:

    The lender’s title insurance protects the interest of the lender up to the loan amount and only needed if you have a mortgage.

    Homeowner’s title insurance protects the interest of the homeowner and is optional. Sometimes, problems arise after you purchase your home such as a previous owner did something fraudulent, like forge a deed or mortgage, that was not discovered in the title search. There are a multitude of defects in the title that could appear, so it is common for homeowners to get title insurance.

    The state of New Jersey regulates the rates of title insurance.

    Settlement Fee:

    This is to cover the cost of the settlement agent at closing. The settlement fee is split between the buyer and seller. (~ $500)

    Notary Fee:

    Usually, the title agent is the notary for the buyer and seller. They make sure the buyer and seller have documentation providing their identity and will witness their signatures on documents such as the deed. (~$30)

    Property Related Fees

    Property Taxes:

    Expect to pay at least 2 months of property taxes at settlement. The amount will depend on the location and characteristics of your home.  Overall, Atlantic County has lower taxes than Camden County and Gloucester County.  This can vary by town though. Hammonton has lower property taxes than Egg Harbor Township and Sicklerville.  Property taxes can change year to year, but rarely decrease.

    Condo/Homeowners’ Association Fees:

    Check with your agent to see if you’re home will be a part of a condo or homeowner’s association. You’ll likely owe additional fees when you buy and sell your home along with the monthly fees.

    Homeowners Insurance:

    Accidents happen and you’ll want to ensure you are protected.  Homeowner’s insurance helps to cover costs in case something bad happens to your home, personal belongings and legal fees in the scenario you get sued.  Although not required by law like auto insurance, lenders will require it for the term of your mortgage.

    Recording Fees:

    The county in which the property is in will determine recording fees and is based on the number of pages in the deed and mortgage (min $30)

    Transfer Tax:

    The state does not charge sales tax when there’s a transfer of title on a property; instead, it charges transfer tax.  The sales price determines the transfer tax owed, and the seller pays this fee.

    Other Prepaid Fees

    Prepaid fees will be due before settlement but after the contract is signed.

    Home Inspection:

    A home inspector will inform you of any issues in the home on that day of the inspection. He or she will prepare a report, which is usually 50+ pages.  This is generally when the fear sets in, but don’t be alarmed. No home is perfect, not even new construction. Your real estate agent and inspector will help guide you through this very important step. (~350).

    Radon Inspection:

    Radon is a naturally occurring poisonous gas in the earth. If you have a basement, you’ll likely want a radon inspection. Read more. (~$75)

    Termite/Pest Inspection:

    Termite damage is common in the South Jersey area so you’ll want to check for termites among other pests. (~$75)

    Lead-Based Paint Inspection:

    Lead was outlawed as an ingredient in paint in 1978.  If your home was built before that time, your real estate agent will provide you with a lead-based paint pamphlet. You can hire a professional to inspect your home to assess the risk.  (~$400)

    Town Certificates:

    Each town requires an inspection before a new owner can occupy their home.  Some towns require a certificate of continued occupancy (CCO) or a smoke and carbon monoxide detector inspection. (~$35-75)

    Septic Inspection:

    This inspection is only necessary if the home is not hooked up to public sewer.  The buyer normally pays for the septic inspection to see if the septic system is up to date with the current regulations. Because these regulations change fairly frequently, systems that are over 15 years old, tend to fail.  New systems can cost between $15,000-$25,000+.  If a home has a cesspool, a new septic system needs to be installed or the home needs to be connected to public sewer if applicable. Local Septic Companies include DiMeglio Septic, Dennis Lassasa Plumbing and Cedar Creek Septic(~$800-1,100)

    Water Test:

    The state requires the water test if the home’s source of water is from a well. Sellers will generally pay for this test.  Remediation is not required by the state, but likely required by your lender and highly recommended since this is your drinking water.  Local NJDEP certified water testing companies include South Jersey Water Test, Vineland Environmental Laboratories, and Cape Environmental Testing Laboratory.

    Who Pays Closing Costs?

    Per the standard NJ Realtor contract, the seller pays for the deed preparation, half of the settlement fee charged by the title company, and the transfer tax.  If the buyer is obtaining VA financing, the seller pays for the termite inspection.

    Buyers always pay for the home inspection.

    The buyer can request seller concessions to cover the buyer’s closing costs for title company and lender fees.  Lenders limit how much the buyer can have the seller pay to 2-6% of the purchase price depending on the down payment and financing type.

    Click here to learn more about seller concession.

    NJ also has many resources to help first-time home buyers. Many people qualify for a 10k Grant Program which covers up to $10,000 in costs for obtaining a mortgage and towards your principal.

    In Summary

    Buying a new home can be frightening at first.  Remember that the agents at Sail Lake Realty are here to guide you and answer all of your questions. You’re not expected to know everything by any means.

    Having an overview of the costs before you buy will help ease your mind and help prepare your budget.

    In real estate, there is not a one method fits all solution. Contact us to understand how you can prepare to be in the best buying scenario under your circumstances and in the current market.

     

     

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