What Are Closing Costs?
Once you've found the perfect home, made an offer, the seller accepted your offer, and your application for a loan finally got approved, you're super eager to move in. However before you get the keys, you'll have a closing.
A "closing" can also be called a settlement, and the closing is the way in which ownership of property is transferred from the seller to the buyer. This can be frustrating. As a buyer, your signature must be added to what seems like never ending stacks of documents and you will also have to write a rather large check for the down payment and a variety of closing costs. It's the fees associated with the closing that often remain a mystery to buyers, who may hand over many of their hard-earned dollars without truly understanding what they are paying for.
In order to be an informed buyer, you should become familiar with these fees, which consist of mortgage fees as well as some governmental fees. Although some of the costs may vary by your location, these are some common examples:
Appraisal Fee: A fee you have to pay for a propety appraisal. Sometimes this fee is already included at the beginning of your loan application process.
Credit Report Fee: A fee that will cover the cost of the credit report requested by the lender.
Loan Origination Fee: This fee covers the lender's loan-processing costs. The fee typically accumulates one percent of the total mortgage.
Loan Discount: You will pay this one-time fee 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 a new owner has 20 percent 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 purchases 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 towards the end of the month.
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, taxes equal approximately to two months 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 work with a real estate expert in the area you are searching to find out which fees--and how much--you can expect to pay for during the closing/settlement of you future home. You should also know that you can negotiate some of these costs with the seller during the negotiation stage of your offer. In some cases, the seller may even agree to pay all of your closing costs.