Closing costs: What you need to know

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Closing costs are a term that can bring confusion and concern. These costs are important to factor in when you’re shopping for a home. It’s easy to get lost in all the fun parts of buying a house: How you’ll redecorate, what colors to paint and how you’ll do more entertaining. However, it’s important not to miss any steps, including prequalifying for a loan and saving for fees.

Fees to expect

At the time you apply for your loan, you should be aware you’ll be paying for more than the principal and interest. There’s a whole laundry list of other fees connected to the loan. Your lender is required to provide you with an estimate of the total of these extra costs, which is called a Good Faith Estimate. In most cases, closing costs will come out to about 2 to 5 percent of the price of the house. In some cases, the seller might agree to pay the closing costs as part of the negotiation.

Typical closing costs

The loan origination fee is the cost of the paperwork and administration related to getting the loan application rolling. You will also pay a cost associated to your credit report. The lender must review your credit history to ensure you’re a good risk for a loan and to decide what your interest rate will be.

Points are fees you pay to get a lower interest rate. When you pay for points with your closing costs, you’ll have a lower monthly payment, and you’ll be able to deduct the points on your federal taxes.

You’ll pay an escrow deposit, which usually involves up-front payments of your property tax and private mortgage insurance for a few months. This money goes into your escrow account and will be used to pay for those fees in the coming months.

A title search is a search the lender requires to ensure there aren’t any liens or unpaid mortgages on the house. You will also have to pay title insurance, which is special insurance that covers the lender if there is a problem with the title.

You’ll pay a recording fee to make the sale official with the local government agencies. Additional fees include your attorney’s fees and the underwriting fee. This is the cost of the work involved in evaluating your loan application.

Inspections and appraisals

Anytime an inspection is mandated, you’ll need to pay for it. A pest inspection, for example, is done to ensure there isn’t any dry rot or related damage.

You’ll also pay for an appraisal of the property. Lenders use the appraisal to determine how much you’ll be loaned because they don’t want to lend more than the home is worth. A survey fee covers the cost of the lender pulling this required document, which details the boundaries, encroachments, and easements of the property.

Once you understand what’s involved in closing costs, it’s one step closer to obtaining your loan and getting ready for moving day.

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