As of this week, my wife and I have officially (and fully) moved into our new house. Although the process was extremely quick once we got started, boy was there a lot that went into it. In turn, I learned a ton along the way — which is why I’ve been sharing a series of stories regarding my homebuying experience over on Fioney.
Since this was such a Money Milestone, however, I wanted to talk about it in-depth and really break it down. After all, while I’ve heard the phrase “closing costs” hundreds of times in my life, I had no idea what they actually entailed. And so, I thought I’d take you through our closing disclosure section by section to give you a better idea of what types of expenses you can expect when buying a home.
The Basics: Our Offer, Down Payment, and Financing
Our accepted offer
For our house, we paid a total of $220,000. This included a few extra appliances we requested and the only counter was that we needed to deposit $1,000 in earnest money. That money was applied to our purchase price — so, the bottom line is that our total cost for the home was $220,000.
Down payment
As you probably know, the rule of thumb when it comes to homebuying is to put 20% down. While there are several programs that now allow buyers to put as little as 1% down (sometimes even without private mortgage insurance), sticking to the 20% rule was right for us for a few reasons. First, in order to keep our payments at an affordable level amid high interest rates, a sizeable down payment was required. Second, since getting approved for a mortgage as two self-employed individuals with a unique income situation was hard enough, trying to explore 1% or 3% down payment options would likely have been difficult. Plus, the odds of having to pay PMI were pretty high.
Luckily for us, we were gifted with $50,000 to be used for a down payment. That worked out near perfectly as, based on the $220,000 purchase price, 20% would be $44,000 — leaving the other $6,000 to be used for closing costs.
Monthly principal and interest
I’m pretty sure we managed to buy our home right about the time mortgage rates peaked. Thus, our APR is 7.999% — but, hey, at least it’s not 8%! (sarcasm)
Anyway, since we’re financing $176,000 (the $220,000 minus $44,000 down payment) and have a 30-year mortgage, our monthly principal and interest payments come to total of $1,291.30.
Now’s a good time to mention that there is no prepayment penalty for this mortgage. That’s notable since 1) we do plan to pay more toward the principal amount when possible and 2) we definitely hope to refinance if/when interest rates fall enough to make it worthwhile.
Estimated escrow
Did you know that your monthly mortgage payments don’t just cover your mortgage? In other words, that $1,291.30 figure that represents our loan principal and interest due each month is not what we’ll be paying. Instead, there are escrow account payments we’ll need to make. These are basically a form of forced savings that help ensure we have enough money to cover homeowners insurance and property taxes each year.
Our estimated escrow payments come to $163.75 per month. That gives us a grand total of $1,455.05 per month we’ll be spending for our “mortgage payment.”
Exploring the Closing Costs and More
“Discount fee”
I have a new favorite oxymoron and it’s “discount fee.” Believe me when I tell you that I literally laughed out loud when I saw this phrase on our paperwork.
Remember when I joked about our interest rate not being 8%? Well, actually, it was — but we paid a small amount in order to buy a lower rate. That’s why we managed to get down to that oh so sexy 7.999%. By the way, this “discount fee” is also often referred to as buying points.
In any case, our 0.098% discount cost us $172.48.
Inspection and appraisal fee
I may not know a whole lot about the homebuying process but I do know at least one thing: always get an inspection first. In addition to the standard inspection, we also elected to have them check for mold, radon, and termites. All of this added up to $850 — plus, annoyingly, there was a 3% credit card processing fee, bringing the total to $875.50.
Although we had the option to pay for our inspection at closing, this would have resulted in yet another additional cost. So, instead, we paid for it at the time it was done. That fee would have been $75, meaning we essentially saved around $50 (accounting for the credit card fee) by taking this approach.
It was a similar story with our appraisal fee. In this case, though, there wasn’t going to be an extra cost for paying at closing — we figured we’d just pay it up front for the heck of it. This cost came to $585.
Again, neither of these costs will go toward our closing cost total since we paid for them before that point.
Various services
Up until this point, I’ve been able to at least explain what each of the fees and expenses were. But now we come to the random stuff I have no idea about. Does this mean I just looked at them and said, “yeah, fine, take my money?” Yes – yes it does.
We start off pretty easy with the credit report fee, which was darn pricey at $62. Then there’s the Electronic Registration (MERS) Fee at a reasonable $24.95 (at least I think it’s reasonable having no idea what it means). There’s also the flood certification, which was a mere $8.
Moving right along into some larger expenses, we were assessed an $85 Tax Service fee from our mortgage broker. And for the biggie, a third-party processing fee set us back a whopping $735! I’m starting to think I’m in the wrong business and need to start doing whatever Signature Processing LLC does.
In total, this section of services we didn’t shop for came to $914.95.
Title services
Continuing the theme of large expenses I don’t yet understand and didn’t shop for, let’s get into the title expenses.
The first line here is a closing protection letter for $25. Next, a $75 endorsement fee. After that is a $594 expense listed as Premium for Lender’s Coverage. Lastly, the fourth line reads “Settlement Or Closing Fee.” I don’t know which it is, but I can tell you it cost me $395.
That gives us a grand total of $1,089.00 for these title fees.
Recording fees
I’ll make this one quick: the recording fee for the deed was $33 while the mortgage one was $114. That’s a total of $147 for this section of our closing disclosure.
Prepayments (Insurance, interest, property taxes)
Earlier, I noted how our monthly payments not only include the principal and interest but also escrow meant to cover insurance and property taxes. Yet, at closing, we still had to make additional payments related to these expenses.
First, we needed to pay for a full year of our homeowners insurance policy. This came to $1,003. Then, we had to pay the year of property taxes, which totaled $962.05. Lastly, we also prepaid interest from our closing date through the first of the month. That came to $925.69.
Yet, somehow, that’s still not it. We also had to load our escrow account with some initial funding. For us, that meant three month’s worth of homeowners insurance payments ($83.58 per month for a total payment of $250.74) and two months of property tax payments ($80.17 a month, so $160.34).
In some good news, there was an aggregate adjustment here. I don’t know exactly what that means, but it resulted in a reduction of $83.53.
With all that said, our Prepayments section came to $2,890.74 while the Initial Escrow Payment section worked out to $327.55.
Owner’s Title Policy
Last but not least, we come to the last section of our closing disclosure: “Other.” This section is where the commissions for the agents are listed — although we didn’t pay those as the buyer. However, this is where another title-related expense is listed.
Interestingly, while the paperwork says Owner’s Title Policy (Optional), I don’t recall ever being consulted about this “optional” fee. Instead, we just paid the $337.00. And now I’m really starting to think I should have asked a few more questions before signing and paying. Live and learn.
The Total
With all of that, our closing costs came to $5,878.72. Added to the $43,000 down payment balance ($44,000 minus the $1,000 earnest money deposit), our required cash to close was $48,878.72.
By the way, rather than write a check, we wired the full $50,000 to the title company the day before our closing. Since that was more than we needed, they cut us a check for the remainder.
From there, we left the title company office with keys in hand, ready to go to our new home!
Phew. Thanks for joining me on this math-heavy dive into my homebuying adventure, I also hope you appreciated the inverse correlation between my levels of knowledge and snark as we worked our way down that list. In any case, for much more on our experience as first-time homebuyers, be sure to follow my new series on Fioney. See you over there!