Buying a home can be confusing, especially for first-time buyers who have never been through the process before. One frequently misunderstood area is closing costs. Many buyers don’t know what to expect or how much they will have to pay. Here is some important information that may help you prepare.
What is Included in Closing Costs?
Closing costs include all of the expenses and fees associated with buying a home. They may be charged by the lender or other third parties for services rendered. This list outlines some of the most typical costs and when they are due.
- Mortgage application fees or loan origination fees: The lender charges this fee to process the loan application. It may be paid prior to or at closing by the buyer.
- Inspection fee: This is the cost of the home inspection charged by a licensed inspector. It may include special inspections, such as for pests or termites, and may be paid ahead or at closing.
- Appraisal fees: Charged by the appraiser to determine the value of the home, these fees are paid by the buyer, usually at closing.
- Fees for survey, title search, and recording fees: These are paid by either the seller or buyer and at closing.
- Brokerage commission: Paid to the real estate brokers by the seller at closing.
- Home warranty: Typically paid at closing, this fee is covered by the buyer, but may be included in the contract as the seller’s or Realtor’s responsibility.
- Property insurance: Paid by the buyer to insure the property, this may be paid to the insurance company prior to closing or included in the closing transaction.
- Property taxes: This amount must be calculated to determine how much the buyer and seller must pay for the prorated portions of the tax year.
- Points: This amount is charged to reduce the interest rate through the life of the loan. One point is equal to one percent of the loan amount
What You Need To Know
Buyers need to know how much all of these fees and expenses will cost. While the amounts can vary widely, you can generally expect to pay between two and five percent of the purchase price. You will receive a loan estimate when applying for a loan, but actual costs are dependent on the state and county of your purchase. Prior to closing, you will receive the Closing Disclosure, an important document that provides exact details of the loan and actual closing costs.
Be wary of the statement: Seller pays closing costs. Where allowed, buyers may request assistance from the seller to cover some costs, but the seller is under no obligation to agree to provide this concession. If he does agree to do so, he may counter with a higher selling price. Read carefully before you sign anything. All costs and accountable parties will be spelled out in the paperwork. Don’t expect to exchange cash at the closing.
What is the Closing Disclosure?
The first sections of the Closing Disclosure provide information about the buyer, seller and lender. It lists the property address, closing date and selected settlement company. It also details the type of loan being used for the purchase. The buyer’s costs are in the next section. The document provides the amounts due to and from the buyer, with the final amount on the last line.
The next section lists the amounts due to and from the seller before moving on to the settlement charges. This includes the amount in escrow, title insurance, lender fees and other settlement charges. The loan estimate is compared to the costs listed on the document, making it easy to see where any differences lie.
The final section provides information on the loan you will receive. This includes the loan amount, interest rate, monthly payments and information about whether this is a fixed or adjustable rate loan. Here, you can also find out whether there is a balloon payment or prepayment penalty.
Take the time to carefully review this statement with your lender before signing. Ask questions to ensure that you understand all of the fees and stipulations. Knowledge and preparation are critical for a smooth, efficient closing with no unwelcome surprises.
We have created a mortgage terminology glossary that can help you make sense of terms you see here or in your loan paperwork, providing a better understanding of your options.