What Are Closing Costs?

Congratulations on finding your dream home! You’re on your way to becoming a homeowner, but before you can get the keys, there’s one final step – the closing.

The closing, also known as settlement, is the process of transferring ownership of the property from the seller to the buyer. It’s an important step that can seem overwhelming at first. As the buyer, you’ll need to sign many documents and provide a down payment and various closing costs. It’s important to understand these costs, as they can add up quickly.

As a responsible buyer, you should be aware of the different fees that are associated with the closing process. These fees can be mortgage-related or government-imposed, and may vary depending on your location. Here are some common fees:

• Appraisal Fee: This fee covers the cost of appraising the property. You may have already paid this fee during the loan application process.
• Credit Report Fee: This fee covers the cost of obtaining a credit report from the lender. You may have already paid this fee during the loan application process.
• Loan Origination Fee: This fee covers the lender’s loan-processing costs and is typically 1% of the total mortgage.
• Loan Discount: This is a one-time charge that you’ll pay if you’ve chosen to pay points to lower your interest rate. Each point equals 1% of the total loan.
• Title Insurance Fees: These fees cover the costs of 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, the lender may require you to pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once you have 20% equity in your home, you can usually 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. If you buy a home early in the month, the prepaid interest fee will be higher than if you buy it towards the end of the month.
• Settlement Accounts: In some locations, the lender may start an account that holds funds for future annual property taxes and home insurance. At least one year’s worth of property taxes and two months of homeowner’s insurance premium will be collected. Additionally, taxes equal to approximately two months in excess of the number of months that have elapsed in the year are paid at closing.
• Recording Fees and Transfer Taxes: Most states charge a fee for recording the purchase documents and transferring ownership of the property.

It’s important to consult a real estate professional in your area to find out which fees you will be expected to pay during the closing process. You can also negotiate these costs with the seller during the offering stage. In some cases, the seller may even agree to pay all of the settlement costs. Remember to do your research and be prepared so that you can smoothly close on your new home.