You’ve found the perfect home, your offer has been accepted, your loan is approved, and you’re ready to move in. But before you can get the keys, there’s one final step – the closing.
Also known as settlement, the closing is the process where the ownership of the property is officially transferred from the seller to the buyer. This process can often be overwhelming. As a buyer, you’ll sign numerous documents and will need to provide a significant check for your down payment along with various closing costs. These closing costs are sometimes unclear, and many buyers may hand over thousands of dollars without fully understanding what they’re paying for.
As a responsible buyer, it’s important to be aware of these costs, which can be related to your mortgage or imposed by the government. While the fees may vary depending on your location, here are some common ones you can expect:
Appraisal Fee:
This fee covers the cost of the property appraisal. You may have already paid this when you first applied for your loan.
Credit Report Fee:
This fee is for the credit report requested by the lender. Like the appraisal fee, it may have been paid at the beginning of your loan application.
Loan Origination Fee:
This fee is charged by the lender to cover the costs of processing your loan. It’s typically around 1% of the total mortgage amount.
Loan Discount:
If you choose to pay points to reduce your interest rate, you will pay a one-time charge for this. Each point equals 1% of the total loan amount.
Title Insurance Fees:
These fees cover the cost of the title search, examination, insurance, document preparation, and any other related title services.
PMI Premium:
If you’re making a small down payment, the lender may require you to pay for private mortgage insurance (PMI). This protects the lender in case of foreclosure. Once you have 20% equity in your home, you can typically apply to remove PMI.
Prepaid Interest Fee:
This fee covers the interest due from the date you close on the home until the first mortgage payment. If you close early in the month, this fee will be higher than if you close later in the month.
Escrow Accounts:
In areas where escrow accounts are used, the lender will set up an account to hold funds for future property taxes and homeowner’s insurance. Typically, they will collect one year’s worth of property taxes and two months’ worth of homeowner’s insurance premiums at closing. If part of the year has passed, you may pay an extra amount to cover the unpaid portion of property taxes.
Recording Fees and Transfer Taxes:
These fees are charged by most states to record the purchase documents and officially transfer ownership of the property.
It’s important to consult with a real estate professional in your area to determine which specific fees you’ll need to pay at closing. Keep in mind that some of these costs may be negotiable with the seller during the offer stage. In some cases, the seller might even agree to cover all or part of the closing costs.