Closing Costs: What You Need to Know
You've found your dream home, your offer has been accepted, your loan is approved, and you're eager to unlock the door to your new life. But before you grab those keys, there's one final step - the closing.
The closing, also known as settlement, is the pivotal moment when property ownership transitions from seller to buyer. While this moment is thrilling, it can also be a bit bewildering. As a buyer, you'll find yourself signing what seems like an endless stack of documents and providing a significant check for the down payment and various closing costs. It's these closing costs that often remain a mystery to many buyers, who may hand over thousands of dollars without truly understanding what they're paying for.
As a responsible buyer, you should have a clear understanding of these costs, which can be divided into mortgage-related fees and government-imposed charges. While specific fees may vary by location, here are some common ones:
1) Appraisal Fee:
- This fee covers the cost of the property appraisal, which you may have already paid at the beginning of your loan application process.
2) Credit Report Fee:
- This covers the expense of the credit report requested by the lender, which may also have been paid during your loan application.
3) Loan Origination Fee:
- This fee handles the lender's loan-processing expenses, typically amounting to one percent of the total mortgage.
4) Loan Discount:
- If you choose to pay points to reduce your interest rate, this one-time charge applies. Each point you purchase equals one percent of the total loan.
5) Title Insurance Fees:
- These fees encompass costs for the title search, examination, insurance, document preparation, and miscellaneous title expenses.
6) PMI Premium:
- If you have a low down payment, the lender typically requires a mortgage insurance fee to protect against foreclosure. You can usually request its removal once you have 20 percent equity in your home.
7) Prepaid Interest Fee:
- This covers the interest payment from your home purchase date to your first mortgage payment. The fee varies based on the timing of your purchase during the month.
8) Escrow Accounts:
- In areas where escrow accounts are common, the lender typically establishes an account to secure funds for future property taxes and home insurance. This account ensures ongoing financial coverage for these expenses. Furthermore, any outstanding property taxes for the current year are addressed during the closing process
9) Recording Fees and Transfer Taxes:
- Most states charge these expenses for recording purchase documents and transferring property ownership.
Remember that you can consult a local real estate professional to understand the specific fees and amounts you'll encounter during your home's closing. Additionally, keep in mind that you can negotiate these costs with the seller during the offer stage, and in some cases, the seller may agree to cover all of the closing costs. Understanding these fees empowers you to navigate the closing process with confidence.