What Are All These Costs About?

Pennsylvania is considered to be a “high closing cost state,” which means that a home buyer here may pay somewhere in the vicinity of 6 percent of the purchase in various settlement fees. I have, on numerous occasions, had real estate agents come to me with the comment that their buyers believed that the fees they paid were going into the agent’s pocket. Nothing could be further from the truth. The only fee a buyer may be paying to their agent would be a buyer’s agency fee, which is only necessary if the agent is not being compensated from the transaction (read: paid by the seller).

The fees buyers pay in conjunction with their transactions are those which are associated with the various services required to settle a piece of real estate. First, you must understand that your costs are broken into two distinct categories: pre-paid expenses and general closing costs. Pre-paid expenses are those that are required by the lender to be paid in advance; items of a recurring nature such as property taxes and hazard insurance. These aren’t fees, but property expenses paid ahead. You’ll be asked to pay your insurance one year in advance and to pay enough tax to reimburse your seller for any portion of the year that they have already paid, as well as a sum sufficient to fund your escrow account so that when your taxes become due next year, there will be enough money to pay them.

The category of closing costs is generally where the questions come from, so allow me to explain. A Mortgage Origination Fee is charged to cover costs associated with the origination of the mortgage and is paid to your lender. A Mortgage Discount is best described as interest paid in advance and when charged is utilized to buy down your interest rate. Again, this is a lender’s charge and is generally an expense you have elected to pay. Of course, there will be an appraisal of the property to verify the value for the lender—this fee is paid to the independent appraiser.

The Credit Report Fee is charged by the lender to obtain your credit records; the fee, collected by your lender, is paid to the credit reporting agency. The Lender’s Review Fee and Funding Fee are lender’s fees paid for expenses associated with the underwriting and funding of your mortgage. The Settlement Fee is charged by the real estate settlement company and is merely payment for their services. A Document Preparation Fee is charged by the lender/settlement company as payment for drawing up the various documents associated with your transaction.

Title Insurance will be required by your lender. Its purpose is to protect you and the bank against any defects in your title to the property. Title endorsements are added to extend that coverage to matters involving survey and boundary issues. These premiums are paid to a title insurance company.

Recording Fees cover the expense of recording the documents pertaining to your property in the county in which the property is located. Generally speaking, we are referring to the mortgage and deed, and these fees are paid to the county. Your Transfer Tax is paid to and shared by the state, school district and local municipality. The Pennsylvania state transfer tax is 1 percent of the purchase price, but the local portion which is shared between the school district and local municipality can be as low as 1 percent, up to a maximum of 2 percent. The local portion changes from one location to the next, so it is necessary to check locally to determine exactly what you may be paying. In any event, these taxes are shared equally between the buyer and seller, so only half of the total will be a buyer’s expense.

A Flood Certificate is required by your mortgage lender to determine if the property you are purchasing is in a flood zone. The certification is rather inexpensive, however, if you are in a flood zone, flood insurance will be required.

Finally, you may wish to consider obtaining a survey, a pest inspection or a home warranty. A survey, although not required, is a pretty good idea. It never hurts to know where your property stops and your neighbor’s begins. The pest inspection has nothing to do with neighborhood children, but deals with the existence of wood destroying insects. Although required in association with some mortgage products, it is usually up to you. Lastly, we have the home warranty, often provided by the seller. If they do not provide one, you may be interested in purchasing one for yourself. It never seems to fail, shortly after you close on your new home, that something breaks—a warranty provides a TON of peace of mind.

So that’s it in a nutshell. Knowledge is power—if not power, at least an explanation.

Gary Straub has been a real estate professional since 1970 and is a member of the Northwood Realty management team.