What Are Closing Costs?
You've found your dream home, the seller has accepted your offer, your loan has been approved and you're eager to move into your new home. But before you get the key, there's one more step--the closing.
Also called the settlement, the closing is the process of passing ownership of property from seller to buyer. And it can be bewildering. As a buyer, you will sign what seems like endless piles of documents and will have to present a sizeable check for the down payment and various closing costs. It's the fees associated with the closing that many times remains a mystery to many buyers who may simply hand over thousands of dollars without really knowing what they are paying for.
As a responsible buyer, you should be familiar with these costs that are both mortgage-related and government imposed. Although many of the fees may vary by locality, here are some common fees:
Appraisal Fee: This fee pays for the appraisal of the property. You may already have paid this fee at the beginning of your loan application process
Credit Report Fee: This fee covers the cost of the credit report requested by the lender. This too may already have been paid when you applied for your loan
Escrow Accounts: In locations where escrow accounts are common, a mortgage lender will usually start an account that holds funds for future annual property taxes and home insurance. At least one year advance plus two months worth of homeowner's insurance premium will be collected. In addition, the taxes escrow will be calculated by adding 2 months to the number of months that have already elapsed in the year (if six months have passed, eight months of taxes will be collected)
Loan Discount: You will pay this one-time charge if you have chosen to pay points to lower your interest rate. Each point you purchase equals 1% of the total loan value
Loan Origination Fee: This fee covers the lender's loan-processing costs. The fee is typically 1% of the total loan value
PMI Premium: If you buy a home with a low down payment, a lender usually requires that you pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once a new owner has 20% equity in their home, however, he or she can normally apply to eliminate this insurance
Prepaid Interest Fee: This fee covers the interest payment from the date you purchase the home to the date of your first mortgage payment. Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it toward the end of the month
Recording Fees and Transfer Taxes: This expense is charged by most states for recording the purchase documents into the county & state records, and transferring ownership of the property from the seller to you
Title Insurance Fees: These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous title fees
Make sure you hire a real estate professional who can walk you through which fees (and how much) you’ll be expected to pay at closing. Keep in mind that you can negotiate these costs with the seller when you make an offer—commonly called “seller closing help”. In some instances, the seller might even agree to pay all of the settlement costs.