Closing costs are charges, fees and pre-paid items for processing your loan and mortgage. Closing costs can even include an optional expense you pay to reduce your interest rate.
Closing costs are collected by the lender but are paid to various organizations from the lender to the government to the mortgage broker. These expenses vary but often add up to between 3 and 6 percent of the amount of money borrowed.
- Fees Paid When You Apply for a Loan(Paid when you submit your application)
- Fees for Closing and Services(Paid on the day your purchase or refinance is final)
- Pre-Paid Amounts Required by Lender(Paid on the day your purchase or refinance is final)
- Fees Paid When You Apply for a Loan
- Typically called "third-party fees", these fees are collected by your lender to pay for services provided by outside parties, such as an appraiser.
- Fees you pay when you apply:
- Appraisal Fee - The amount charged by an appraiser who determines the value of a home.
- Credit Report Fee - The fee for receiving your credit report from a credit reporting agency. Unlike most traditional lenders, YourHomeLoan.info charges this fee at your closing.
How Much Will I Pay?
By law, lenders must give you a document called a "Good Faith Estimate" within 3 days after you apply for a loan. This paper tells you how much you should expect to pay for closing costs. It is a lender's best estimate of how much all the fees cost. The actual amount you pay may be different. Amounts and types of fees and charges vary based on your geographic location, the loan and other considerations.
Fees for Closing and Services
These are fees typically paid on the day your home purchase or refinance is final. If you are buying a home, some of these fees may be negotiable with the seller - he or she may agree to share some closing costs. If so, make sure this agreement appears in the purchase contract you sign.
If you want to keep more cash on hand, your lender may suggest including your closing costs in your total loan amount. This is what it means when you hear "no cost" or "no out-of-pocket expenses". Often available with home refinance loans, this option has the advantage of eliminating your up-front expenses. The disadvantage is that your loan amount increases and you end up paying interest on the costs. We'd be glad to help you decide whether this option is for you.
Fees for closing and services:
- Real Estate Agent Commission - The amount you've negotiated to pay a real estate agent or broker when you buy a house - usually, a percentage of a home's price.
- Origination Fee - The fee charged by the lender for processing your loan.
- Loan Discount or "Points" - You can sometimes receive a lower interest rate, by "paying points". A point is equal to 1% of the amount of money you are borrowing.
- Settlement or Closing Fee - The fee paid to the closing agent to act as a disinterested third party who handles the finalizing of your loan and the purchase of a home.
- Title Insurance Costs - To issue title insurance, government and other records must be searched to make sure no one else has a legal claim to the home. A title insurance binder and an insurance policy are also required. You are charged separate fees or an all-in-one amount for these costs. The title insurance policy you are required to purchase protects the lender. It is a very good idea to pay a little bit extra and take out a separate title insurance policy that protects you.
- Attorney's Fees - If you live in an area where an attorney works on title or other parts of a home purchase, there is a fee for legal services.
- Property Taxes - Any local property tax must be paid annually. If you purchase a home in the middle of the year, you may be asked to share some of the year's taxes with the home seller. The closing agent prorates the amount you owe.
- City, County and State Charges - The local governments where you live may charge taxes and fees to record and stamp documents such as deeds and loan paperwork.
- Survey - The cost of surveying the property to determine the size of the lot your home is on. Or, for example, whether a public utility company has a right to have access to the property.
- Pest Inspection - If an appraiser notices signs your home may have termites or other pests, or if the laws in your area require it, a pest inspection and report must be done. Fees for these services are included in closing costs.
- Flood Check Fee - Lenders must check Federal Flood Maps to find out if your home requires flood insurance. This fee covers the map search and issuing a certificate.
Pre-Paid Amounts Required by Lenders
When you purchase or refinance a home, there will be some necessary charges to cover things like the interest on your loan until your first payment is due. These are called "pre-paids" and are collected on the day your purchase or refinance is final.
Pre-paid costs required at closing:
Interest - If your loan is finalized before the last day of the month, at closing you must pre-pay interest on the loan for the time between the day the loan funds and the first day of the next month.
Homeowners' Insurance Premium - One year of this insurance coverage that protects the lender and you if the property is damaged is paid at the loan closing.
Private Mortgage Insurance - Typically, if you make a down payment of less than 20 %, lenders require Private Mortgage Insurance (PMI) to protect them in the unfortunate event that a borrower does not repay the loan.
Reserve or Escrow or Impound Account - This account is set up and held in trust for you by the lender. It is used to pay for property taxes, homeowners' insurance, flood insurance and PMI. Usually, at loan closing enough money to pay for at least 2 month's worth of these items is deposited in the account. Your lender pays these bills for you when they are due. Your monthly mortgage payment includes money that is deposited into this account. Not all loans require a reserve account.
At YourHomeLoan.info, a Home Loan Counselor is always ready to explain closing costs in more details. Call 1-800-470-7567.
The bundle of fees associated with the buying or selling of a home are called closing costs. Certain fees are automatically assigned to either the buyer or the seller; other costs are either negotiable or dictated by local custom.
Buyer closing costs
When a buyer applies for a loan, lenders are required to provide them with a good-faith estimate of their closing costs. The fees vary according to several factors, including the type of loan they applied for and the terms of the purchase agreement. Likewise, some of the closing costs, especially those associated with the loan application, are actually paid in advance. Some typical buyer closing costs include:
- The down payment
- Loan fees (points, application fee, credit report)
- Prepaid interest
- Inspection fees
- Mortgage insurance
- Hazard insurance
- Title insurance
- Documentary stamps on the note
Seller closing costs
If the seller has not yet paid for the house in full, the seller's most important closing cost is satisfying the remaining balance of their loan. Before the date of closing, the escrow officer will contact the seller's lender to verify the amount needed to close out the loan. Then, along with any other fees, the original loan will be paid for at the closing before the seller receives any proceeds from the sale. Other seller closing costs can include:
- Broker's commission
- Transfer taxes
- Documentary Stamps on the Deed
- Title insurance
- Property taxes (prorated)
Negotiating Closing Costs
In addition to the sales price, buyers and sellers frequently include closing costs in their negotiations. This can be for both major and minor fees. For example, if a buyer is particularly nervous about the condition of the plumbing, the seller may agree to pay for the house inspection.
Likewise, a buyer may want to save on up-front expenditures, and so agree to pay the seller's full asking price in return for the seller paying all the allowable closing costs. There's no right or wrong way to negotiate closing costs; just be sure all the terms are written down on the purchase agreement.
At the closing, certain costs are often prorated (or distributed) between buyer and seller. The most common pro-rations are for property taxes. This is because property taxes are typically paid at the end of the year for which they were assessed.
Thus, if a house is sold in June, the sellers will have lived in the house for half the year, but the bill for the taxes won't come due until the following year! To make this situation more equitable, the taxes are prorated. In this example, the sellers will credit the buyers for half the taxes at closing.