UNDERSTANDING CLOSING COSTS

You've found your dream home, the seller has accepted your offer, your loan has been approved and you're eager to move into your new home. But before you get the key, there's one more step--the closing!

The closing, also known as the settlement, is the process of passing ownership of property from seller to buyer, and it can be bewildering. Most buyers understand and plan for their down payment at the closing table, but it's the additional fees associated with the closing that remain a mystery for many buyers who may simply hand over thousands of dollars without really knowing what they are paying for. We're here to pull back the curtain.

Closing costs are the various fees and expenses that homebuyers will pay to finalize their real estate transaction. Not all the costs in the list below will be applicable to you, but they are essential to budget for when navigating the home-buying process. Make sure you consult a real estate professional in your area to find out which fees--and how much--you will be expected to pay at your closing. Keep in mind that you can negotiate these costs with the seller during the offering stage. In some instances the seller might even agree to pay all the settlement costs.

As a responsible buyer, you should be familiar with these costs that are both mortgage-related and government imposed. Although many of the fees may vary by locality, here are some common fees.

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Common Closing Costs:

Recording Fees & Transfer Taxes:

Paid to local government offices to officially record the property’s purchase and transfer of ownership.

Loan Origination Fee:

Charged by the lender to cover the administrative costs of processing the mortgage loan. This is typically 1% of the total loan amount.

Appraisal Fee:

Pays for appraising the property to evaluate the home’s current market value. Lenders require this to ensure the property is worth the loan amount. You may already have paid this fee at the beginning of your loan application process.

Title Search & Title Insurance:

The title search ensures that the property is free of legal claims or liens, while title insurance protects both the buyer and lender from future disputes over ownership.

Home Inspection Fee:

Paid to a professional inspector who checks for any major structural, plumbing, or electrical issues with the home. This is paid at the time of the inspection.

Credit Report Fee:

Covers the cost of the credit report requested by the lender. This too may already have been paid when you applied for your loan.

Survey Fee:

A fee that allows you to confirm the home's official property boundaries. While typically optional, this is sometimes required by lenders.

Attorney Fees:

Covers the cost of a real estate attorney to review and prepare legal documents for the buyer and lender.

Escrow Fees:

Your mortgage lender will set up this account to hold funds for future property taxes and homeowner’s insurance for your financial protection. For home insurance, you’ll pay one year’s worth of premiums + an additional two months. For property taxes, the lender collects an amount equal to the number of months passed in the year + two months. For example, if six months have elapsed, eight months of taxes will be paid at closing.

Prepaid Costs (Escrow Prepaids):

Covers the interest payment from the date you purchased the home to the date of your first mortgage payment. Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it towards the end of the month.

Private Mortgage Insurance (PMI):

Required if your down payment is less than 20%. PMI protects the lender in case of foreclosure. This may be paid upfront or added to your monthly mortgage payments. However, once a new owner has 20% equity in their home, he or she can normally apply to eliminate this insurance.

Discount Points:

If you have chosen to pay points to lower your interest rate you will pay this one-time charge. Each point you purchase is equal to 1% of the total loan.

HOA Fees:

If your property is part of a Homeowners Association, you may need to pay prorated HOA fees for the remainder of the year at closing.

Credit Report Fee:

If your property is part of a Homeowners Association, you may need to pay prorated HOA fees for the remainder of the year at closing.

How can you ESTIMATE your closing costs?

Your lender is required by law to give you a customized Loan Estimate (LE) sheet within a few days of submitting your mortgage application. This will help you budget your closing cost expenses and includes the following:

At least 3 business days before your closing, your lender will provide you with your final Closing Disclosure (CD) form listing your official closing costs. This will give you time to review the document, ask questions, and ensure everything is in order. It's important to review the Closing Disclosure carefully, especially if anything is incorrect, surprising, or unclear. You should compare your Closing Disclosure with your Loan Estimate to see if anything has changed significantly. Typically, you’ll be asked to bring a checkbook to closing or pay via cashier’s check.

HOW CAN YOU LOWER YOUR CLOSING COSTS?

Closing costs can add up quickly, but homebuyers have several options to reduce these expenses.

Shop Around for Lenders:

Different lenders offer varying rates and fees. Compare offers to find the best deal.

Negotiate with the Seller:

Depending how your offer is structured, sellers are sometimes willing to cover part or all of your closing costs.

Look for Lender Credits:

Some lenders offer credits toward closing costs in exchange for a slightly higher interest rate.

Ask About Discounts:

First-time homebuyer programs or military/veteran benefits may offer reduced fees.

Close at the End of the Month:

This reduces prepaid interest, which can lower your closing costs.

In your diligent efforts towards homeownership, don’t underestimate the power of understanding these terms and effective strategies to boost your confidence, minimize closing costs and keep your budget on track.