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 called the settlement in some other states, the closing is the process of passing ownership of property from seller to buyer. And it can be bewildering and stressfull. As a buyer, you will sign what seems like endless piles of documents and you may have to present a sizeable check for the down payment and various closing costs. It's the fees associated with the closing that many times remains a mystery to most buyers who may simply hand over thousands of dollars without really knowing what they are paying for.
As a responsible buyer, you should be familiar with these costs that are both mortgage-related and government imposed. Although many of the fees vary by locality, here are some common fees:
Appraisal Fee: This fee pays for the appraisal of the property that the lender conducted to ensure the home's valued in alignment with your purchase price. You may already have paid this fee at the beginning of your loan application process and this is not required for cash buyers.
Credit Report Fee: This is a fee your lender passes on to you for the cost of the credit report requested by the lender. This too may already have been paid when you applied for your loan.
Loan Origination Fee: This lender's fee covers the loan-processing costs. The fee is typically one percent of the total mortgage.
Loan Discount: This is when you can buy point to lower your loan rate. You pay this one-time charge if you have chosen to pay points to lower your interest rate. Each point you purchase equals one percent of the total loan. Lenders offer this so they can make money up front instead of over the long term.
Title Insurance Fees: These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous title fees. This fee always varies base on the purchase price of the home.
PMI Premium: PMI is Private Morgage Insurance. For those who buy a home with less than 20% down payment, a lender usually requires that you pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once a new owner has 20 percent equity in their home, the used to be able to apply to eliminate this insurance. But now, buyes are forced to refianance their loan to eliminate PMI and save money each month.
Prepaid Interest Fee: This fee covers the interest payment from the date you purchases the home to the date of your first mortgage payment. Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it towards the end of the month.
Escrow Accounts: Mortgage lenders will usually start an account that holds funds for future annual property taxes and home insurance. Federal laws prohibit lenders from collecting too much money up front and escrow accounts be reviewed every year. In Illinois, we pay taxes for the previous year, the seller will pay the taxes for the current year at closing. This normally funds the escrow account. and the lender will require you to have prepaid homeowners insurance for the year at the time of closing.
Recording Fees and transfer taxes: This expense is charged by most states for recording the purchase documents and transferring ownership of the property.
Make sure you consult wih James and his team to find out which fees--and how much--you will be expected to pay during the closing of you prospective home. Keep in mind that you may be able negotiate these costs with the seller during the offering stage and negotiation stage.