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 step: the closing.
Also called the settlement, the closing is the process of transferring property ownership from seller to buyer. It can feel overwhelming: as a buyer, you’ll sign what seems like endless documents and present a sizeable check for the down payment and various closing fees. Many of the fees involved remain a mystery to buyers who often pay them without fully understanding what they cover.
As a responsible buyer, you should be familiar with the closing costs that are both mortgage-related and government-imposed. Although these fees vary by location, below are the most common ones:
Appraisal Fee
This fee pays for the appraisal of the property. You may already have paid it at the beginning of your loan application process.
Credit Report Fee
This covers the cost of the credit report requested by the lender. If paid earlier in your application, it may not appear again at closing.
Loan Origination Fee
This fee covers the lender’s loan-processing costs, usually about one percent of the mortgage amount.
Loan Discount Points
If you choose to buy points to reduce your interest rate, you will pay this one-time fee. Each point equals one percent of the total loan amount.
Title Insurance Fees
These fees cover the title search, title examination, insurance, document preparation, and other related title services.
PMI Premium
If you’re buying with a low down payment, the lender may require mortgage insurance. This protects the lender in case of foreclosure. Once you reach about 20% equity in the home, this insurance may be removed.
Prepaid Interest Fee
This fee covers the interest from the day you close on the home until the date of your first official mortgage payment. If you close early in the month, the total prepaid interest can be higher.
Escrow Account Setup
In many states, lenders require escrow accounts for taxes and insurance. At closing, you may need to prepay:
-At least one year of homeowner’s insurance
-Two months (or more) of property taxes
-Additional months for insurance premiums depending on the time of year
Recording Fees & Transfer Taxes
States charge these fees for recording the purchase documents and transferring ownership of the property.
Important Final Step
Before closing, consult with a real estate professional in your area to understand which fees apply to your situation and how much you can expect to pay. Some fees are negotiable