Closing costs are the fees associated with the process of transferring the ownership of a property from the seller to the buyer. These costs can be both mortgage-related and government-imposed, and it's important for responsible buyers to be familiar with them. Here are some common closing costs:
- Appraisal Fee: This fee pays for the appraisal of the property, which may have already been paid at the beginning of the loan application process.
- Credit Report Fee: This fee covers the cost of the credit report requested by the lender, which may also have been paid during the loan application.
- Loan Origination Fee: This fee covers the lender's loan-processing costs and is typically one percent of the total mortgage.
- Loan Discount: This one-time charge is paid if the buyer chooses to pay points to lower their interest rate. Each point purchased 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 a buyer purchases a home with a low down payment, the lender usually requires them to pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once the new owner has 20 percent equity in their home, they can normally apply to eliminate this insurance.
- Prepaid Interest Fee: This fee covers the interest payment from the date the home is purchased to the date of the first mortgage payment. The prepaid interest fee will be higher if the home is purchased early in the month compared to 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.
It's important to consult a real estate professional in the area to find out which fees and how much will be expected to be paid during the closing process. It's also possible to negotiate these costs with the seller during the offering stage, and in some cases, the seller might agree to pay all of the settlement costs. Being aware of these costs and negotiating them can help buyers save money and avoid any surprises during the closing process.