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Sealing the Deal: Understanding Mortgage Closing Costs
You’re so close. You’ve gone through the exciting and maybe even exhausting process of finding your perfect home, but now the closing is in sight! With our tips below, you can be prepared for what to expect in the next phase.
A lot goes into a mortgage closing, including signing what might seem like a hundred documents! Most of the closing costs that are incurred will likely be paid, by you—the buyer; knowing the estimates and the process will help the process go more smoothly.
What are Closing Costs?
Closing costs include most fees associated with a real estate transaction, which are paid at the “closing,” when the title to the property is transferred from the seller to the buyer. These costs typically include an appraisal fee, title-related charges, lender fees, state or local transfer taxes, amongst other items.
Depending on your purchase, closing costs may be paid by either the seller or the buyer, although the actual costs will vary depending on your lender, the state you’re purchasing in, and the actual costs of the services involved in your transaction.
Non-Negotiable Closing Costs
Transfer taxes are included in closing costs, with amounts determined by the city and state where you’re purchasing your new home. Government agencies, typically within a county, also charge recording fees for recording real estate transfers and title-related documents in the public registry.
Lender Fees
Fees can vary based on where you live, the home you’re buying and what type of loan you’ve chosen. They tend to be 2-5% of the purchase price of your home. Loan fees go directly to the lender. These are among the most important fees to keep in mind when comparing lenders. Below are some common lender fees and what they mean.
- Discount Points: Fees paid to the lender in exchange for a reduced interest rate.
- Document Preparation: Cost to prepare the loan documents and other legal documentation associated with the transaction.
- Loan Processing: Fee charged by the lender for processing the loan application.
Third Party Fees
Several services included in closing costs are collected by the lender, and then distributed to the person or company who actually performed the service. Such services include:
- Appraisal: Cost of having a professional appraiser assess the fair market value of the home.
- Credit Report: Cost of obtaining the buyer’s credit report, which shows their credit history.
- Survey: If the lender has required a property survey, this may be paid by the buyer, or seller. (This is sometimes paid before closing.)
- Owner Title Insurance: Protects the homeowner, while they, or their heirs, own the property. It is not always required, but may be in some states.
- Lender Title Insurance: Cost of the lender’s policy, which is required by the lender to protect their investment.
- Flood Certification Fees: Cost to determine whether the property is located in a flood zone. If it is, you will need to have flood insurance, paid for separately.
- Home Inspection: If inspection fees have not been paid prior to closing, they will be collected at this time.
- Title Search: The fee to research the title to the property, to be sure it can be properly transferred from the seller to the buyer.
- Closing Agent: Fees paid to the title company or attorney responsible for overseeing the details to close the sale of the home.
Required Advances
Sometimes referred to as “pre-paid” items, these fees may be required at the time of closing.
- Escrow Account: You may be required to prepay a portion of your homeowners insurance and property taxes into an escrow account, to ensure the lender has sufficient funds to pay these fees when due, on your behalf.
- Mortgage Insurance: An insurance policy which protects lenders from losses due to the default of a mortgage loan. Mortgage insurance could be required depending on amount of your downpayment or the equity in your home.
- Homeowners insurance premium (1 full year paid in full)
- Prepaid Interest
Before your closing day arrives, be sure to review all your options to help reduce your closing costs, and stay within that budget you’ve planned. And if you’re thinking of buying a home and have questions about the closing process, give us a call!
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