What are closing costs and prepaids?

by | Mar 21, 2020

When buying a home you will need to come up with more money than just the expense of your down payment. There are closing costs and prepaid expenses that you will pay at the time of closing.

These are typically referred to as the “closing fees” and you will need to pay these fees, along with your down payment. The amount of these costs is different for everyone.

Closing costs include:

  • Loan appraisal
  • Origination fees
  • Settlement costs
  • Title insurance
  • Recording fees
  • Home inspections – or any other inspections

On average, home buyers can expect to pay between 2 and 3 percent of the purchase price of their home in closing costs. That means if your home costs $200,000, you could expect to pay around $5,000 in closing costs.

Prepaid items are other costs or expenses paid at the closing table.

Prepaid items include:

  • First year’s hazard insurance premium
  • Taxes
  • Insurance
  • Escrow money
  • Mortgage Interest – this is the interest due from the day you close to the first of the month.

Avoiding closing costs

Lenders can sometimes arrange to cover a portion or all of your closing costs, depending on the loan amount. Here’s how it works: They can arrange a slightly higher interest rate on the loan and wrap the closing costs into the total mortgage owed. This option makes sense for buyers who may want to save their cash or can’t secure the cash to pay the closing fees. Not all lenders are able to offer this option, so check with your lender first. You can also do something similar by negotiating with the seller to give you a credit at closing equal to the amount of your closings costs and prepaids. Of course the seller will subtract this (in their minds at least) from the price they are receiving for the home, so likely you will pay a little more for the home than you would otherwise to achieve this; but you get the benefit of conserving more cash for your needs when you purchase a new home.