What Are Closing Costs?

Closing costs are the charges that purchasers and sellers typically incur in order to complete a real estate transaction, in addition to the property’s price. Loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges are all examples of these expenditures. 

Within three days of receiving a house loan application, the lender is obligated by law to provide these charges on a loan estimate form. Closing expenses may apply to gifts of equity (real estate transactions to a relative or close friend at a below-market price).

How Much Are Closing Costs?

Closing fees are incurred when a property’s title is transferred from the seller to the buyer. The entire monetary amount of closing charges varies depending on the area and the property’s valuation. Homebuyers typically spend between 2% and 5% of the purchase price in closing expenses. Lenders are required by law to offer a loan estimate that includes the transaction’s closing fees. 

They are required to submit this information within three days of receiving the borrower’s loan application under the federal Real Estate Settlement Procedures Act (RESPA). The lender must also submit a closing disclosure statement describing all closing fees at least three days prior to the closing. The fees listed may differ from the loan estimate.

What Do Closing Costs Include?

The loan estimate and closing disclosure will detail all of the closing fees. Here are some of the most common costs you’ll experience:

Application fee

The lender will charge you a fee to handle your mortgage application. Before applying for a mortgage, check about the lender’s policies.

Attorney fee

A real estate attorney charges a fee to design and evaluate property purchase agreements and contracts. A real estate transaction does not have to be handled by an attorney in every state.

Closing fee

This cost, which is sometimes known as an escrow fee, is paid to the party in charge of the closing: the title firm, escrow business, or attorney, depending on state law.

Courier fee

If you’re signing paper documents, this charge will help speed up their delivery. You might not have to pay this fee if the closing is done digitally.

Credit report fee

A fee is charged ($15 to $30) by a lender to get your credit reports from the three major credit agencies. Because they receive a discount from the credit reporting agencies, certain lenders may not charge this cost.

Escrow deposit.

At closing, some lenders demand you to put two months’ worth of property tax and mortgage insurance payments into an escrow account.

Flood determination and monitoring fee

This is a fee paid to a flood inspector who is certified. The role of the inspector is to evaluate whether the property is in a flood zone and so requires flood insurance (separate from your homeowner’s insurance policy). Continuous monitoring of changes in the property’s flood status is included as part of the price.

Homeowner association transfer fee

You may be obliged to join a homeowner association (HOA) if you purchase a condominium, townhouse, or property in a planned development. This charge covers the costs of transferring ownership, such as paperwork updates. You should double-check if the charge is paid by the seller or the buyer before signing the contract. A copy of the HOA’s financial statements, notifications, and minutes should be provided by the seller, along with paperwork showing HOAdue amounts.

Homeowners insurance

At closing, a lender will normally want proof that you’ve paid your first year’s homeowner’s insurance premium.

Lead-based paint inspection.

This is a cost paid to a professional inspector to assess if the property contains lead-based paint that is hazardous to health.

Lender’s title insurance

The lender is protected by an upfront, one-time charge paid to the title business if an ownership dispute or lien emerges that was not discovered during the title search.

Origination fee

This fee is normally 1% of the loan amount and pays the lender’s administrative costs in processing your loan. To cover these costs, some lenders do not impose origination fees and instead charge a higher interest rate.

Owner’s title insurance

This coverage safeguards you in the event that your home’s ownership is challenged. It is normally optional, but legal experts strongly advise it.

Pest inspection

This is a one-time fee that covers the cost of a professional pest inspection to check for termites, dry rot, or other damage. An inspection is required in some states and for some government-insured loans.

Points

Points (or discount points) are an optional advance payment to the lender that lowers your monthly payment by lowering the interest rate on your loan. A point is equal to 1% of the loan amount. Paying points may not save you any money at a time when mortgage interest rates are already low.

Prepaid daily interest charges.

A payment to cover any interest that will accumulate on your mortgage from the time you close until your first payment is due.

Special Considerations: Mortgages With No Closing Costs

Many, but not all, fees for the buyer at closing are eliminated with no-closing-cost mortgages. If you’re short on funds, these mortgages can help in the short term, but they normally come with higher interest rates. Your lender may offer to incorporate your closing expenses into your mortgage, but this may increase your loan balance and require you to pay interest on those charges.

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