The are two types of closing costs: recurring and Non-recurring closing costs. Samira, why do I care about the details? You need to care because this could mean the difference between you being able to close or not having enough money to close. You will receive an estimate of what those fees are within 3 days of your loan application, and then receive a final accounting of what the fees will be three days before closing. This final amount may be a few thousand higher than you anticipated, so keep some money in reserve just in case. I will explain a little later why this happens.
You typically need to save around 1.5-2% of the purchase price in closing costs. On a $500,000 home, this is about $10,000. But Samira, I already saved my down payment - what are these additional costs? I'm glad you asked, let's check it out.
Recurring Closing Costs
These are charges you will pay again, either monthly or yearly. The lender will have you pre-pay some of them to have padding to pay these for you. These include homeowners insurance, HOA fees, property taxes and mortgage insurance premiums (PMI).
Homeowner's insurance and Property Taxes
Your bank will typically establish an "escrow account" and pay your homeowners insurance and property taxes for you. They take the entire amount you would pay in a year, divide by 12 months and add a little bit of padding in case of increases. This amount is added to your monthly mortgage amount.
At the beginning of the loan, they need to fill this account to ensure they can pay the necessary costs. You will likely have to pre-pay a whole year of homeowner's insurance and the first property tax payment (half of your yearly amount).
Handy Tip from Samira: Just because you paid the homeowner's insurance premium for the next year, doesn't mean you don't have to pay it each month. You will still have to pay 1/12th of the cost each month to build up reserves to pay for the policy when it comes due for renewal.
Handy Tip #2 from Samira: Your property taxes are paid in advance, so if the buyer paid less for the house than you did then you will need to pay the city the difference. The city will send you a bill after closing, it sometimes takes a little while to receive. You can estimate that cost here: LA Supplemental Tax Estimator Link
You will also pre-pay some of the interest on the loan and mortgage insurance. Interest is paid in arrears. If your loan closes on June 15th, you will need to pre-pay the interest for June 15th through June 30th - 15 days worth of interest. If you end up closing early, this amount goes up. If you close on June 2nd, you will prepay interest for June 2nd through the 30th, 28 days of interest.
If you are using an FHA or VA loan, you may need to pay a lump sum for your mortgage insurance as a guarantee. For example, you currently have to prepay
All recurring costs you have to pay will be pro-rated according to what day of the month you close. This is where that padding I mentioned comes in, since there's a big difference between paying a few days of interest versus 28 days of interest!
Non-recurring Closing Costs
These are one time costs you pay to purchase the house and get your loan.
Title Insurance Policy, Escrow fees, Appraisal fee, Notary fee, credit report fee, transfer taxes, recording fees and all costs associated with preparing the loan (the price you pay the lender for the loan).
Escrow likes to add a little bit of padding to the entire amount so that they don't come up short when paying all the bills on the house, so they typically ask for a little more than they need. A couple weeks after closing, you may get a little check in the mail with the overage.
The best way to understand the overall costs is to ask your friendly escrow agent. They're there to help you and create a smooth transaction for both the seller and buyer.