Nickels and Dimes: Adding Up Closing Costs

When buying a new house, it's not as easy as signing on a dotted line. Closing costs can sneak up on you and burn a hole in your wallet. Here's how to weed out the mandatory fees from the negotiable ones.
REMAX_Top-dollar-house-money_s4x3

REMAX_Top-dollar-house-money_s4x3

By: Karin Beurlein

Reading your average good faith estimate from a lender can feel like bleeding to death through a thousand tiny pinholes. Where on earth did all these closing costs come from, and do you really have to pay them all?

The answer is...maybe. Some closing costs represent actual costs to the lender imposed on it by third parties, and you'll have a tough time talking your way out of them. Here are some examples:

  • Credit check fee. The lender has to pay this to verify your credit history.
  • Appraisal fee. A lender must make sure your house is worth the price you're paying. If an appraisal fee seems exorbitant (more than a few hundred dollars in most areas of the country), ask for an explanation.
  • Title insurance fee. Here's a hefty one. This large fee purchases an insurance policy protecting the lender in case legal problems crop up with the title to your home. Note that the insurance doesn't protect you at all; if you want an insurance policy against such a fiasco, you have to purchase it yourself at or within a stipulated time period of closing. Most title insurance companies recommend you do this, but of course they're the ones making money from selling you the policy. Problems with title are uncommon, but legal fees can be costly when they do occur, so it's up to you to decide whether you want to assume the risk.
  • Courier fees and document preparation fees for the title insurance company.
  • Fees for determining whether you live in a flood-prone area.
  • Government fees for tax stamps affixed to the deed and for recording the transfer of the deed.

On the other hand, fees charged directly by the lender line its own pockets. That doesn't mean they're inappropriate fees to charge, but it does mean they're negotiable. The main ones you'll encounter are these:

  • Loan origination fee, or origination point. This fee is essentially the lender's charge for going to the trouble of processing your application and making sure you and your house are worthy of its money. The loan origination fee is often expressed as a percentage of the loan total.
  • Underwriting fees, commitment fees and application fees. These are also intended to cover the cost of doing business.
  • Discount points. Like origination fees, these fees are expressed as percentage points of the total loan amount. One "point" is a fee equal to one percent of the loan, and each point you pay at closing reduces the interest rate on your loan by a set amount.

Some lenders do charge unnecessary closing fees to pad their bottom lines. The best way to avoid this is to compare GFEs from several lenders; junk fees tend to stick out because not everyone will offer them. Ask about any fee whose purpose you don't understand.

Finally, expect your closing costs to include pre-paid portions of your insurance and property taxes to put into your escrow account. The amount depends on the month and day of your closing.

Keep Reading

Next Up

Closing Costs: Adding Up the Details

Buying a home? Here's how to know what you—and your wallet—can expect from your final statement.

What You Need to Know About HOAs

Get the lowdown on how a community is managed before you buy.

Packing Supplies Checklist

These must-have packing supplies will help you have a smooth move.

What to Know Before Buying Your First Home

Buying a home is the most important purchase you’re likely to make. You want to get it right.

Out the Door: Things To Do Before You Go

Moving day may be hectic, but don't forget to do these things before officially moving out of your old house.

How to Recession-Proof Your Home Purchase

First-time homebuyers, word to the wise: Look for attributes that add value to your new home to help combat falling prices. Here, basic guidelines to follow.

Prevent Surprises with Your Co-Buyer

Avoid surprises with your co-buyer by checking for tax liens, owe back child support or outstanding court judgements against them.

Mortgage Interest Deduction: Homeowners' Biggest Tax Perk

Here, how the mortgage interest deduction helps improve your bottom line.

Moving Insurance

Keep your goods protected in transit.

My Home Appraisal is Lower Than Expected!

If your home is appraised at lower than your sale price, don't freak out. Take real estate expert Tara-Nicholle Nelson's savvy advice.

On TV

Follow Us Everywhere

Join the party! Don't miss HGTV in your favorite social media feeds.