Escrow Closing Costs and Other Third-party Fees: What You Should Know

Whether you’re purchasing or refinancing a home, there will be closing costs. These costs include items such as fees for processing, title insurance/search (title closing fee), mortgage taxes, appraisals, closing, and more. They’re necessary costs of doing business and are subject to change. Closing costs can vary depending on where you live, the mortgage lender you’re working with, and the property’s sales price.

Home buyers usually pay between about 2% to 5% of the purchase price of their home in closing costs. So, if your home costs $250,000, you might pay between $5,000 and $12,500 in closing fees.

Within closing costs, there are third-party fees. These fees come from companies that don’t work for mortgage lenders yet provide essential services like escrow. Escrow is when an impartial third party holds on to funds and distributes them accordingly to process a transaction. The funds, also known as earnest money, is typically held in an escrow account by an escrow officer or attorney. Escrow costs cover the final closing paperwork and handle the exchange of funds and recording of deeds. Keep in mind, that each individual service comes with its own fee.

There are common misconceptions about the relationship between closing costs and escrow fees. Explore escrow fees, other third-party costs, and key mortgage terminology that you should know before closing on a home.

Are closing costs the same as escrow?

The term "escrow closing costs" is a bit misleading. To clarify, escrow fees are a specific part of closing costs and vary depending on which company you use. Escrow fees can also vary significantly based on the property’s purchase price.

What are escrow fees?

An escrow fee, or closing fee, is paid to the title company, escrow company, or attorney for conducting the closing of a real estate transaction. Typically, the title or escrow company oversees the closing as an independent party. In some states, a real estate attorney is required to be present so make sure to check your state’s requirements.

Who pays the escrow fee?

It depends. There are cases where the escrow fee is split between the parties and others where the buyer or seller handles it on their own.

What is estimated escrow?

Once you receive an initial Loan Estimate, you'll notice a section labeled "Projected Payments" on Page 1. This section is divided into "Principal and interest," "Mortgage insurance," and "Estimated escrow." It's worth mentioning that the estimated escrow serves as a ballpark figure for the monthly cost of your homeowners insurance and property taxes.

How do escrow services work?

At closing, the escrow officer or real estate attorney creates closing statements and distributes funds accordingly. Examples include.

• Real estate commissions to the agents

• Loan fees to the mortgage lender

• Taxes and other fees to the county

• Charges to third-party providers

• Profits from the transaction to the seller

The escrow company also assists with document signing. You’ll visit the escrow office toward the end of the real estate transaction.

More importantly, escrow provides a final recording of all documents with your county or other local government entity. This ensures your ownership is indisputable and that there’s a record proving ownership.

Other common third-party and lender fees

Lender title insurance

This protects your mortgage lender against problems with the title to your property. For example, in the event, someone sues to say they have a claim against the home. Lender’s title insurance is usually required to get a home loan.

Appraisal fee

This covers the cost of having a professional appraiser evaluate a home and estimate its current market value. The cost of appraisals varies significantly depending on how much work is required.

Assignment recording fee

Government fee paid to your local recording office. It covers the creation of an official record of the deed transfer from the seller to the buyer. Although estimates can vary, the recording fee should be the same for all properties that fall within the same jurisdiction.

Closing protection letter

A fee charged by escrow agencies to create a closing protection letter (CPL) – a document that puts liability on the title company if the escrow does not disburse the home purchase funds appropriately.

Tax service fee

A tax service company takes this fee to verify that there are no outstanding tax liens against the purchased home. Mortgage lenders require the tax service fee in case a defaulting borrower doesn’t pay their property taxes. Those taxes are deducted from the foreclosure sale and decrease the amount the lender can recover.

Credit report fee

This fee covers the cost of a credit report, which shows your credit history to lenders. They use the information in a credit report to help decide whether or not to finance your home loan and how much money to lend.

Flood certification

Essentially indicates what level of flooding danger threatens your property. The federal government assigns flood zones to all areas. The areas that are prone to flooding require home buyers to purchase flood insurance to get a mortgage.

Overall, fees are unavoidable. But among third-party closing costs, there are some negotiable ones. Make sure to do your due diligence. Learn which closing costs are negotiable and who pays what before signing on the dotted line. More importantly, don’t leave money on the closing table!