When buying a home, understanding closing costs vs prepaid fees can prepare you for the expenses you must pay, and help you spot any errors. When you know what to look for during your closing, this final stage in buying your home can be a joyous event.
So you’ve found your next house, made an offer that was accepted and got a mortgage loan, although not necessarily in that order. The point is: you’re now in a live transaction, waiting for all the behind-the-scenes stuff — such as the appraisal, inspection and final loan approval — to finish. Before you get the keys and move in, though, you have the closing: a meeting to sign the paperwork and legally agree to accept the loan.
In North Carolina, an attorney runs the closing; in California, it’s the escrow officer. This is the person responsible for making sure you understand all the forms you’re signing and the reasons for the money you most likely have to pay that day. Before your closing, learn what to expect from closing costs vs. prepaid fees.
What Are Closing Costs?
Closing costs are the common expenses your lender incurs to make the sale happen. These expenses can range from two to six percent of the purchase price. Some lenders, like GoPrime Mortgage, Inc. . (Prime Mortgage Lending and Equity Services, Inc.), are completely transparent when it comes to closing costs. Closing costs include:
- Appraisal fee. To determine the property’s fair market value, an independent appraiser has to confirm its value. By law, you get a copy of the appraisal after it’s completed.
- Underwriting/processing fees. Also known as the origination fee, this is what your lender charges you to process the information for your loan application.
- Credit reports. Part of your loan process involves obtaining credit reports from each credit reporting agency. The costs of these reports are passed to you.
- Title insurance. A third-party company makes sure the title of the home is free from encumbrances or issues. Owner title insurance protects your ownership of the property. Lenders require it to protect their interest in the property.
- Attorney fees. In North Carolina, you pay an attorney to oversee the closing of the real estate transaction. In California, this is the Escrow Fee.
- Home inspection. It’s in your interest to have the property inspected before closing to make sure it’s structurally sound. This fee is what the inspector charged.
- Property survey. Sometimes, you need the learn the exact property boundaries. This fee goes to the company that confirms and establishes property lines.
Closing cost aren’t exclusively your responsibility. Some of these expenses may be paid by the seller. Some fees are open to negotiation; others are not.
What Are Prepaid Fees?
After your closing, your lender is required to pay certain bills for you and collect money toward others. When considering closing costs vs prepaid fees, a big difference is prepaid fees are associated with the home rather than the real estate transaction. Prepaid fees include:
- Real estate taxes. When buying a new home, expect to pay taxes up front. The amount is determined by the previous year’s tax assessment.
- Accrued interest. Interest on your loan accrues from the date you close to the end of the month. The date of the closing, the value of your home and amount of your loan all play a part in determining this fee.
- Association dues. Your new home may be a part of a homeowners’ association (HOA). HOAs often require fees for the maintenance and upkeep of the grounds around your home.
- Homeowner’s Insurance. Your yearly homeowner insurance amount is due at closing to protect you from damages right away.
- Mortgage insurance premiums. Your lender sometimes requires you to pay for private mortgage insurance as a condition for getting the loan. This fee guarantees your loan to the lender if you’re unable to pay.
- Hazard insurance premiums. If you need special hazard insurance to protect your home — because the property’s on the coast or in a flood plain, for example — you have to pay for it immediately.
Differences Between Closing Costs vs Prepaid Fees
Don’t debate closing costs vs prepaid fees. While they are expenses over and above the initial price of your home, you have to pay them unless your loan type lets you roll the payments into the loan amount. One primary difference is that closing costs are one-time expenses. You’re basically paying for the services behind getting the loan.
Unlike closing costs, prepaid fees are recurring expenses during the life of your mortgage. Often, the money you pay for pre-paid fees gets put into an escrow account, from which your lender or escrow impound pays the bills when they come due. Make sure you know how pre-paid fees will affect your monthly mortgage payments.
Understanding Closing Costs vs Prepaid Fees
Home buying and selling laws require lenders — like Zack Adam of Prime Mortgage Lending of West Asheville — to provide a Loan Estimate (LE) of your closing costs and pre-paid fees within three days of receiving your loan application. But the final costs may be different. Three days before closing, you’ll receive another disclosure statement, called the Closing Disclosure (CD), from your lender that lists more accurate fees.
Contact Zack Adam at 828-348-1907 to discuss closing costs vs prepaid fees before you purchase. Understanding the difference can help you avoid surprises. And knowing where your money’s going can put you at ease when it’s time to close on your new home.