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So you've been pre-approved for the loan, found the perfect house, had your offer accepted, and now you're moving toward closing. You're getting ready with the funds you will have to bring to the closing table. But what is this total? What are these costs?

When we refer to closing costs for a mortgage we are talking about the costs associated with purchasing the home that are not part of the sales price. These fees go to the service providers that work toward your purchase, and there are a lot of hands involved. For every transaction there are buyers, sellers, agents, lender, attorneys, appraiser, and inspectors. The list can go on depending on the details of the transaction! All of these service providers have a fee, and some of those fees go into your closing costs. Here is an example of a Closing Disclosure for a recent purchase:

Starting from the top:

The origination fee is charged by the lender for processing and originating your loan. These buyers did not pay discount points, but if they had the fee would appear in Section A.

Section B details the services where the borrower did not have an option of providers. Neither buyer nor lender is allowed to select the appraiser, but this fee is typical. It is shown as paid before closing as the borrower pays for the appraisal up front, when it is ordered. The charges for credit report, flood certificate, and tax service are paid to vendors used by the lender to gather information on the property that is required for the loan.

Section C is used for third parties that the borrower can select. Typically the buyer's agent will assist in this selection and will make recommendations as necessary. This section is where we see the attorney's fees as well as the cost for title insurance. In North Carolina, a real estate attorney facilitates the purchase and acts as neutral go-between for buyers, sellers, agents, and lender. The attorney researches the title of the property, procures title insurance policies, and manages the funds and documents at closing. As to title insurance, there are usually two policies on a loan - one that protects the buyer and one that protects the lender. Title insurance protects the insured against claims made on the title to the property (I will talk about this in more detail in another post!)

The other piece of the closing cost puzzle is the portion that goes to prepaids (homeowners' insurance and property taxes) and government entities. It is customary for the borrower to pay the fee for the mortgage to be recorded with the county and the seller to pay the state transfer tax, as shown in Section E.

Sections F&G break down the prepaid insurance, property tax, and interest. As you can see, the first year of homeowners' insurance is paid up front and then a few months' worth of payments is deposited into the escrow account - same for taxes (see the separate post on escrow accounts for more info on this!)

Section H shows the real estate agents' commission, which is always paid by the seller. Buyers never pay for the services of their agent!

Hopefully this sheds some light on closing costs and what goes into the costs of buying a home. Please reach out with any questions and happy house hunting!


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