What Are 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, also known as the settlement. This real estate closing process involves transferring ownership of property from the seller to the buyer, and it can be quite bewildering. As a buyer, you will sign what seems like endless piles of documents and present a sizeable check for the down payment and various closing costs. Understanding these home buying costs is crucial, as many buyers often hand over thousands of dollars without fully knowing what they are paying for.  

As a responsible buyer, you should be familiar with these mortgage-related costs and those imposed by the government. While many of the fees may vary by locality, here are some common fees you should expect during the closing process:  

- **Appraisal Fee**: This fee covers the appraisal of the property, which you may have already paid at the beginning of your loan application process.  

- **Credit Report Fee**: This fee includes the cost of the credit report requested by the lender, which may also have been paid when you applied for your loan.  

- **Loan Origination Fee**: This fee covers the lender's loan-processing costs and is typically one percent of the total mortgage.  

- **Loan Discount**: You will incur this one-time charge if you choose to pay points to lower your interest rate, with each point equaling one percent of the total loan.  

- **Title Insurance Fees**: These fees generally encompass costs for the title search, title examination, title insurance, document preparation, and other miscellaneous title fees.  

- **PMI Premium**: If you buy a home with a low down payment, the lender usually requires you to pay a mortgage insurance fee, which protects them against loss due to foreclosure. Once you have 20 percent equity in your home, you can typically apply to eliminate this insurance.  

- **Prepaid Interest Fee**: This fee covers the interest payment from the date you purchase the home until your first mortgage payment. Generally, if you buy a home early in the month, this fee will be significantly higher compared to purchasing it towards the end of the month.  

- **Escrow Accounts**: In areas where escrow accounts are common, a mortgage lender will often set up an account to hold funds for future property taxes and home insurance. They will collect at least one year's advance plus two months' worth of homeowner's insurance premium. Additionally, taxes equivalent to approximately two months based on the elapsed year will be paid at closing. (If six months have passed, eight months of taxes will be collected.)  

- **Recording Fees and Transfer Taxes**: This expense, charged by most states, is for recording the purchase documents and transferring ownership of the property.  

Ensure you consult a real estate professional in your area to determine which fees and how much you will be expected to pay during the closing of your prospective home. Remember, you can negotiate these home buying costs with the seller during the offering stage, and in some instances, the seller might even agree to cover all of the settlement costs.