What Are Closing Costs?
You've found your dream home, your offer has been accepted, your loan application has final approval, and you're ready to move into your new home. But, there is one more step--the closing.
During the closing, the buyer and seller will meet with their respective real estate agents, attorneys or title company representatives to sign the necessary paperwork and complete the transaction. The title company will review the title to the property and both parties will sign closing documents, such as the deed, mortgage, loan documents, and other paperwork. The title company will also collect all funds due, including the down payment, closing costs, and any additional fees. Once all the paperwork is signed and all funds are collected, the title company will record the deed with the county, the transaction is complete, and the buyer can take possession of the property
As a responsible buyer, you should familiarize yourself with these costs that are both mortgage-related and government imposed. Here are some common fees:
Appraisal Fee is a fee paid to a professional appraiser to assess the value of a property. The appraiser will conduct a thorough analysis of the property and use comps from similar properties in the area to determine an estimated market value. The appraiser will also look at any structural features of the property and assess the condition. This fee is sometimes collected at the beginning of the loan application process.
Credit Report Fee covers the cost of the lender requesting a copy of your credit report. This is also sometimes paid for when you apply for your loan.
Loan Origination Fee is a fee charged by a lender for processing a new mortgage loan application. This fee covers the costs associated with evaluating and processing the loan application, including title searches, and other administrative costs. The origination fee can range from 0.5%-1.5% of the loan amount, depending on the lender and the loan program.
Loan Discount is an upfront fee paid to reduce the interest rate of a loan. It is usually equal to 1% of the loan amount, so one loan discount point on a $100,000 loan would cost $1,000. This fee is paid at closing and can lower the mortgage rate by a quarter of a percentage point, depending on the loan type. Discount points are an effective way to reduce the cost of a loan over the long term, but not everyone will benefit from them. It’s important to weigh the cost of the points against the benefit of the lower interest rate to determine if it makes financial sense.
Title Fees for a mortgage typically include fees for an attorney or other professional to review and prepare the title documents, title insurance, fees for a survey or other document review services, and fees for recording the mortgage with the county.It’s best to contact a mortgage professional in your area to get an accurate estimate of what your title fees will be.
PMI Premium is an insurance policy that protects the lender in the event of a borrower defaulting on their mortgage payments. It is typically required in cases where the borrower is unable to make a 20% down payment on their home. The premium is usually paid on a monthly basis and is usually added to the borrower’s monthly mortgage payments. The amount of the premium is based on factors such as the loan’s loan to value ratio, the borrower’s credit score, and the type of loan.
Prepaid Interest Fee is a payment made by a borrower to a lender prior to the scheduled date of interest payments. This payment is usually used to cover the interest for the period between the initial loan disbursement and the first scheduled interest payment. Pre-paid interest can be beneficial to borrowers as it can reduce the amount of interest paid over the life of the loan.
Escrow Accounts are a special account held by a lender in order to pay property taxes and insurance on behalf of a borrower. Funds are collected each month along with the mortgage payment and held in the escrow account, then paid out as needed to cover the bills. This helps to ensure that the homeowner pays their taxes and insurance on time, and makes it easier for the lender to manage the loan.
Recording Fees and transfer taxes are for recording the purchase documents and transferring ownership of the property.