What Are Closing Costs?
So you've found your dream home, the seller has accepted your offer, your loan has been approved and you're eager to close escrow and move into your new home. But before you get the keys, there's one more important step.
Also called the settlement, your closing is the process of passing ownership of the property from the seller to you - the buyer. And it can be pretty confusing if you're not used to it. As a buyer, you will sign what seems like endless piles of paperwork, disclosures, etc., and then you'll have to present a sizeable check for the down payment and various closing costs. These are all the fees associated with closing your escrow that many times remains a mystery to buyers, who may simply hand over thousands of dollars without really knowing for sure what they are paying for.
As a responsible buyer, you should be familiar with these costs that are both mortgage-related and government imposed. Although many of the fees may vary by locality, here are some common fees:
Appraisal Fee: This fee pays for the appraisal of the property. You may already have paid this fee at the beginning of your loan application process, so it may show up on your settlement sheet as "POC" (paid outside closing).
Credit Report Fee: This fee covers the cost of your credit report requested by the lender. This too may already have been paid when you applied for your loan.
Loan Origination Fee: This fee covers the lender's loan-processing costs, and is typically about one percent of the total mortgage amount, depending on your specific loan program. Some lenders will quote you a teaser, saying there are no loan-origination fees, but that can also affect your rate and your overall cost (APR).
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 amount. Everyone's situation is different, so remember this: If you're not planning to keep this property for a long time, paying discount points may not fit your situation well.
Title Insurance Fees: These fees generally include costs for the escrow service, 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 (under 20%), a lender may require that you pay a fee for mortgage insurance. This fee is designed to protect the lender against loss due to foreclosure. Once a new owner can document that they have 20 percent or more equity in their home, however, they can usually apply with their lender to eliminate this insurance and lower their monthly payment.
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. It's really six one, half a dozen the other, because you're just paying a per diem amount from the closing date until your first regular payment, but it can lower your closing costs to close toward the end of a month.
Escrow Accounts: Your mortgage lender may start an impound account that holds funds for future annual property taxes and home insurance. You may see, for example, debits on your settlement sheet for six months worth of these costs, plus an up-front annual fee for homeowner's insurance. 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 may be collected.) This all may seem like you're paying twice, but you're not. The up-front fee covers the next twelve months of insurance, for example, then your impound account will be fully funded at that time for your loan service to pay the premium again.
Recording Fees and transfer taxes: This expense is charged by most states for recording the purchase documents and transferring ownership of the property.
We will be going over these costs and fees with you during your escrow, which fees--and how much--you will be expected to pay during the closing of you prospective home. Keep in mind that you may be able to negotiate some of these these costs with the seller during the offering stage. If that's possible, we'll make sure it's part of your offer.
If you have questions, submit the following form and we'll get right back to you.