Closing costs are the fees you pay when you obtain a mortgage loan. Typical closing costs run anywhere from 2% to 5% of your loan amount. For example, on a $250,000 loan, you'll pay between $5,000 and $12,500 in closing costs. Here is what's typically included in closing costs:
Property Taxes
These are fees homeowners pay to the state and county to help fund the school district where you will be living, pay to repair and keep roads in good condition, and fund the local library, to name a few. The tax amount varies depending on where you live and the amenities available in your community.
Usually, you will be responsible for paying property taxes from the date of closing forward, and the seller will pay from January to the date of closing. Your lender will typically collect between three and six months of property taxes from you at the time of closing. This is to ensure there is enough in escrow to pay the tax bill when it comes due.
Recording Fee
Recording fees are charged by the county to record the documents related to the transfer of ownership of the property. This takes place every time a house is bought or sold.
Loan Origination Fee
This is a fee charged by the lender as compensation for handling your mortgage loan from inception to closing. The amount of this fee varies from lender to lender.
Homeowner's Insurance
This insurance typically protects loss related to the property. It is required by the lender so that they know the property is protected. The cost of this insurance varies depending on the value of your home and the amount of coverage you carry on the property.
Primary Mortgage Insurance
Lenders require PMI on Conventional loans if the borrower does not put at least 20% of the sales pricedown towards the down payment. This insurance is protection for the lender should the loan ever go into default. Ona. home valued at $250,000, you would need to have a down payment of $50,000 to equal the 20% down, or you will be charged PMI.
Appraisal
The appraisal provides the lender with an independent opinion on the value of the home. It is provided by a professional who is trained to estimate the value of real estate. The home appraisal process provides assurance to the lender that the amount they are lending is not greater than the value of the property.
Credit Report Fee
The credit report provides the lender with information about your credit history and credit worthiness. If your score is too low, it will impact your ability to secure financing and could cost you the ability to obtain the best interest rate available.
Flood Inspection
The flood inspection determines whether the property you are purchasing lies in a flood zone. If it does, flood insurance will be necessary.
Pest Inspection
Your lender will require a pest inspection if the appraiser notices any infestation of termites or other pests when completing the appraisal. In some places, a pest inspection is required on all deals.
Title Search
The title search is performed by a title company. They are responsible for making sure the title to the home is clear, meaning there are no defects in the title or problems that would prevent the title from transferring to you at the time of purchase.
Title Insurance
You will need two types of title insurance when buying a home. The first kind protects your lender (lender's title policy) in case something was missed during the title search. The second type of title insurance is an owner's title policy. This protects you against any defects or problems in the title just as the lender's policy protects the lender.
Survey Fee
If there is a question regarding property lines, the title company can order a survey.
Discount Fee or Points
When you pay points toward your mortgage loan, it is also known as buying down the loan. These fees, paid to your lender, lower the interest rate of your loan. One point equals 1% of the loan amount. In our previous example of a $250,000 loan, you would pay $2,500 to buy the loan down one point. The amount the one percent buy down would impact your interest rate varies by lender, type of loan, and current mortgage rates.
Escrow Fee
The escrow company is responsible for handling all the funds involved in buying your new home. They make sure all parties involved in the transaction get paid accurately. The fee charged by the escrow company, also known as the closing fee or settlement fee, pays for their involvement in the transaction.
Prepaid Daily Interest Charges
At the time of closing, borrowers pay interest on their loan from that date to the end of the month. If your closing date is near the end of the month, you will pay fewer taxes than if you closed on your loan the first week of the month. The seller is responsible for paying interest from the first of the month to the date of closing.
Bottom Line
While this is a list of all potential closing costs, not all of these costs may apply to your loan. Each home loan varies depending on loan type, the lender, current mortgage rates, etc. If you have a question about your closing costs, reach out to your lender to discuss this in depth.
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