What Are Closing Costs?
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 keys, there’s one more thing you’ll need to know – how much money will you need to bring to closing?
Also called the settlement, the closing is the process of passing ownership of property from the seller to the buyer. And it can be overwhelming! As a buyer, you will sign what seems like endless piles of documents and you will have to present a sizable 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.
Loan Origination Fee: This fee covers the lender’s loan-processing costs. The fee is typically one percent of the total mortgage amount but every lender is different.
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 one percent of the total loan.
Title Insurance Fees: These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous title fees.
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 you have 20 percent equity in their home, you can normally apply to eliminate this insurance.
Prepaid Interest Fee: This fee covers the interest payment from the date you purchases the home to the date of your first mortgage payment. Generally, if you close on a home early in the month, the prepaid interest will be substantially higher than if you close towards the end of the month.
Escrow Accounts: In most cases (unless you are putting down 20%), a mortgage lender will usually start an account that holds funds for future annual property taxes and homeowner’s insurance. Your annual insurance premium plus an additional two months will normally be collected. In addition, two months of taxes in excess of the number of months that have elapsed in the year are paid at closing. (If six months have passed, eight months of taxes will be collected.)
Recording Fees and transfer taxes: This expense is charged by most states for recording the purchase documents and transferring ownership of the property.
Make sure you consult with your lender to find out which fees (and how much), you will be expected to pay at the closing of your new home. Keep in mind that you can negotiate these costs with the seller during the offering stage. In some instances, the seller might even agree to pay all of the settlement costs.
We’re always here to help you navigate through the mortgage maze, so please reach out with any questions you have.