What Are Closing Costs?
Nothing is better than finding your dream home, accepting your offer, getting your loan approved, and moving into your new home. Before you get the keys, there's one last step--the closing.
The closing, also known as the settlement, is the transfer of property ownership from one owner to another. There is a lot to learn, which can be unclear. When you're a buyer, you'll need to sign endless documents and present a large check for the down payment and closing costs. Many buyers need to be aware of the fees associated with closings and may hand over thousands of dollars without fully understanding what they are paying.
As a responsible buyer, you should be aware of these mortgage-related and government-imposed costs. The following are some standard fees, although they may vary by the locality:
Appraisal Fee: This fee covers the cost of the appraisal. The fee may have already been paid at the beginning of the loan application process.
Credit Report Fee: Lenders charge this fee for credit reports. As part of your loan application, this may have already been paid.
Loan Origination Fee: This fee covers the lender's loan-processing costs. The price is usually one percent of the mortgage.
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, examination, document preparation, title insurance, and other miscellaneous title fees.
PMI Premium: If you buy a home with a low down payment, a lender usually requires you to pay a mortgage insurance fee. Lenders are protected from foreclosure losses by this fee. In most cases, a new homeowner can eliminate this insurance once they have 20 percent equity in their home.
Prepaid Interest Fee: Covers interest payments between the time you purchase a house and the time you make your first mortgage payment. Prepaid interest fees for homes purchased early in the month are generally higher than those purchased late in the month.
Escrow Accounts: Mortgage lenders usually begin escrow accounts to hold funds for future property taxes and homeowner's insurance in locations where escrow accounts are standard. A one-year advance plus two months' worth of homeowner's insurance premium will be collected. Moreover, taxes equal to approximately two months more than the number of months elapsed in the year are paid at closing. After six months, the tax collection period extends to eight months.
Recording Fees and transfer taxes: Most states charge this expense when recording the purchase documents and transferring ownership.
Find out what fees you will be responsible for during your prospective home's closing by consulting a real estate professional in your area. Negotiating these costs with the seller during the offer stage is possible. Sometimes, the seller might even agree to pay all the settlement costs.