What Are Closing Costs on a House?
There’s a lot to consider as you plan to buy a home. For example, what are closing costs? How much are typical closing costs? What do closing costs include?
Closing costs are the third-party expenses you’ll pay before finalizing the sale of a property and receiving the keys to your new house. Home closing costs include all the fees, taxes, expenses and other charges associated with the purchase. For most people, closing costs will be between two and seven percent of the cost of your new home.
For example, if your home costs $250,000, you can expect to pay anywhere from $5,000 to $17,500 in closing costs on top of your down payment.
What Are Typical Closing Costs On a Home?
Exactly what are closing costs on a house? What you’ll pay depends on many factors, like the price of the house and fees specific to your loan or the type of home you’re buying. The most common items you’ll see include:
- Attorney and real estate broker fees
- Home inspections and property appraisal
- Homeowners insurance (paid at closing)
- Property tax and title transfer tax
- Title insurance (both lender and owner)
- Loan and escrow fees
- FHA or private mortgage insurance
As you navigate this process, you’ll want to find the best insurance available to protect your new home. Talk to an independent agent to find the best homeowners insurance policy for you.
Is Homeowners Insurance Included in Home Closing Costs?
Every situation is different, but in most cases your lender will require that you pay one year of homeowners insurance premiums upfront as part of your closing costs. This protects you and the lender just in case something goes wrong in your first year of home ownership. It also gives you a head start on premium payments.
After the first year, you can begin making monthly insurance payments if that’s your preferred payment method. Typically, the only time you aren’t expected to pay these premiums at closing is if you buy a home in cash or set up an escrow account.
How Is Homeowners Insurance Paid at Closing?
There are a couple ways to pay your homeowners insurance premiums at closing. First, you can choose to pay the insurance company directly. In this case, you’d pay the same way you would for renter’s insurance or even an auto insurance policy. The only difference is that you will be required to pay a full year’s premiums upfront and provide proof of payment to your lender. Some banks may require you to independently purchase home insurance prior to the closing and to provide a copy of the policy. Check with your lender or real estate agent to confirm what is expected for your closing.
Another option is to open an escrow account. Escrow accounts are basically savings accounts set up by your mortgage lender. This is to make sure your house, and their financial investment, is always protected by home insurance from day one. If you do have an escrow account, your lender will have you put the money for the first year’s premiums in there at closing and they’ll make sure everything is paid for the homeowners insurance policy you choose.
Is Homeowners Insurance Included in My Mortgage?
Yes, homeowners insurance is included in your mortgage if you choose to or are required to pay through escrow. In some cases, like if your mortgage down payment is less than 20% of the total purchase price, the lender may require it. If you do pay through escrow, you’ll see a line item in each monthly mortgage bill for an “escrow” payment. Money paid toward the “escrow” fee are put into this account for your lender to use to pay recurring expenses like property tax and homeowners insurance premiums on your behalf.
Be careful, however, not to confuse homeowners insurance with private mortgage insurance (PMI). You’ll likely see this charge on monthly mortgage statements too if you put less than 20 percent down on your house. While homeowners insurance will protect your house and your belongings in a covered accident, PMI is a type of coverage that protects your lender in case you don’t pay your mortgage loan back.
If you do put 20 percent or more down at closing or your lender does not require you to have an escrow account, your mortgage will likely not include payments toward items like homeowners insurance and taxes so you’ll have to make sure to budget for the required premiums.