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A Closer Look at Closing Costs

what they are and why they’re important

Closing costs are an important part of any home purchase, and home-buying budget. But even if you’ve bought a house and paid closing costs before, you may not have fully understood what they include. 

“Closing costs” refers to a variety of fees payable at or before loan closing, usually adding up to 2 to 5 percent of the home’s purchase price. They may vary depending on the type of mortgage you have, where you live, your lender, and other factors. 

Not all fees are required. While many are fixed, others can be negotiated, or you can lower them by shopping around. Sometimes the seller may even pay some or all the closing costs as part of the offer process. Your real estate agent can help you understand the closing costs you’re likely to incur.

Lender Fees

Origination fees. Charged by the lender for costs associated with creating the loan, typically 1 percent of the purchase price of the home. 

Application fees. Costs from the lender to cover the processing of your mortgage application.  

Courier fees. Fees for legal documents to be transported via courier. If you sign all documents electronically, these aren’t incurred. 

Appraisal costs. The home appraisal determines the fair market value of the house and allows lenders to know if it’s being sold for a price the market will support. 

Credit check. Fees for the lender to verify your credit before issuing you a mortgage. 

Lead-based paint and pest inspection fees. In most cases, a home must be inspected for lead-based paint as well as termites and other destructive pests. 

Survey fees. Charged by a surveyor to review the dimensions of the property you’re buying and provide a report that confirms the boundaries and whether there are any issues related to them, such as a structure that crosses them improperly. 

Points. Most lenders will offer the option to pay an extra fee, called points, that reduces the interest rate on your mortgage. Each point equals one percent of the home’s purchase price, and you’ll pay for points at closing. Paying for points may be helpful if you plan on staying in the house for a long time; otherwise, they may not make enough difference to be worth it. 

Title Fees

Title search. Costs for the title company’s search for any competing claims to the property being sold, as well as any liens. 

Title insurance. There are two types: One protects the lender if there are problems with the title (for example, old back taxes, liens from a home equity loan, or erroneous surveys) that weren’t discovered during the title search. Basically, it protects the lender from title-related issues that may be expensive to resolve. The cost is usually included in closing costs. The second type of title insurance is to protect you, the buyer. Optional, but widely considered to be worth buying. In most cases, this type is paid for by the seller of the property. 

Recording fees.  Charges from your city and/or county government to update their records to reflect your ownership of the home. These fees vary by state, and not all states charge for this service.   

Closing fees. Covers services of the company that handles your actual closing. In many cases, this is a title company, but sometimes it’s an escrow company or attorney. 

Prepaid Costs

Escrow. Buying a home typically involves establishing an escrow account to hold funds used to pay your homeowners insurance and property taxes. It’s funded by your monthly mortgage payment, ensuring that these are always paid, and paid on time. Just keep up with your mortgage payments, and the rest is handled for you. 

Insurance and taxes. When you close on your mortgage, you’re usually required to pay 14 months of homeowners’ insurance premiums, plus anywhere from two to six months of property taxes into your escrow account. If your mortgage doesn’t involve an escrow account, you’re responsible for paying the homeowner's insurance premiums and property taxes directly. 

Interest prepayment. Buyers are typically required to prepay the mortgage interest that will accrue between the day of closing and the first mortgage payment. 

Association fees. If the property being bought is a condo or part of a homeowners’ association and they have an annual fee, you may be required to pay for up to a full year upfront. 

Closely review the disclosure forms you receive before you sign all the closing paperwork. They’ll show the final closing costs, interest rate and payment and are provided three business days before closing to give you time to compare them to the loan estimate the lender provided when you applied for your loan. Don’t be afraid to ask questions. The more you understand your closing costs, the better off you’ll be. 

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