Closing Costs 101

You’ve probably heard of closing costs but if you’ve never bought or sold property, the term can be confusing. Let’s first take a look at “closing.” Closing is the point at which the title of the property is transferred from seller to buyer. The costs associated with this are collectively known as the closing costs, and may be footed by either the buyer or seller (this part is often part of the negotiation).

So you’ve done all the work up to this point, run the budget, crunched the numbers and found a place at a price you can live with. But it’s important to bear in mind you’ll still need to consider these final costs. Here’s what you can expect:

  • Application Fee:  This is the amount it costs the lender to process your application. Not all lenders will pass this cost on to you but some may.
  • Appraisal: This is the money paid to whomever does the appraisal (i.e. determines its market value) on your home.
  • Attorney Fee: A licensed attorney will need to review the closing documents (though not all states require this).
  • Closing or Escrow Fee: This goes to the title company or escrow company or to the attorney. The service they provide is as an impartial, independent party to the sale of the home.
  • Courier Fee: Any transportation costs incurred during the process.
  • Credit Report: A report will be pulled on your credit by all three main credit bureaus as part of the standard process of assessing your creditworthiness and rate.
  • Escrow Deposit for Property Taxes & Mortgage Insurance: You may be asked to put down up to two months of property tax and mortgage insurance payments at closing.
  • (FHA loans only) Up-Front Mortgage Insurance Premium (UPMIP): You’ll be required to pay the UPMIP of 1.75% of the base loan amount. You may also be entitled to roll this into the purchase amount.
  • Flood Determination or Life of Loan Coverage: If the property is in a flood zone, you will have to buy flood insurance. This money goes toward someone determining if the property is in that flood zone.
  • Home Inspection: This is a critical and not-to-be-missed step in the process. You’ll want to have an impartial inspection of the property and negotiate any repairs in advance of the sale.
  • Home Owners Association Transfer Fees: If you’re buying into a property that’s governed by an HOA, your seller will have to provide all the paperwork for you to know and understand the HOA dues, rules, and regulations. 
  • Homeowners’ Insurance: Be prepared to pay a full year’s worth of this insurance at close!
  • Lender’s Policy Title Insurance: This assures the lender that you own the home and the lender’s mortgage is a valid lien and protects them in case of dispute.
  • Lead-Based Paint Inspection:Covers the cost of evaluating lead-based paint risk.
  • Loan Discount Points:These points are prepaid interest on your loan. One point is one percent of your loan amount. This is a lump sum payment that lowers your monthly payment for the life of your loan.
  • Owner’s Policy Title Insurance: This typically optional policy that protects you in the event someone challenges your ownership.
  • Origination Fee: This covers the lender’s administrative costs. Typically, this 1 percent of the total loan but you can sometimes find mortgages with no origination fee.
  • Pest Inspection: This fee covers the cost to inspect for termites or dry (as required in some states and for some government loans0. 
  • Prepaid Interest: Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first payment.
  • Private Mortgage Insurance (PMI): If your down payment is less than 20 percent, you’ll most likely have to pay PMI. Typically, your first month’s payment will be due at closing.
  • Property Tax: Typically, lenders expect taxes due within 60 days of purchase to be paid at closing.
  • Recording Fees: A fee charged by your local recording office, usually city or county, for land records purposes.
  • Title Company Title Search or Exam Fee: Because the title company researches the deed to your home, this is the payment for their work.
  • Transfer Taxes: This is the tax paid when the title passes from seller to buyer.
  • Underwriting Fee: This also goes to your lender, covering the cost of vetting you for the loan.

Though it sounds overwhelming, you can generate a fairly accurate estimate using this closing cost calculator

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