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, the closing is the process of passing ownership of property from seller to buyer. And it can be bewildering. As a buyer, you will sign what seems like endless piles of documents and will 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 many 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 may vary by locality, here are some common fees:
Appraisal Fee: This fee pays for the appraisal of the property. You may already have paid this fee at the beginning of your loan application process. The appraisal is an opinion of value and often used by banks in determining the maximum they are willing to lend.
Credit Report Fee: This fee covers 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 fee covers the lender's loan-processing costs. The fee is typically one percent of the total mortgage.
Loan Discount: You will 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.
Title Insurance Fees: These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous title fees. The purpose of title insurance is to allow the legal ownership to transfer free and clear from the seller to the buyer.
PMI Premium: If you buy a home with a low 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, however, he or she can normally apply to eliminate this insurance.
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: In locations where escrow accounts are common, a mortgage lender will usually start an account that holds funds for future annual property taxes and home insurance. At least one year advance plus two months worth of homeowner's insurance premium will be collected. In addition, taxes equal approximately to two months in excess of the number of months that have elapsed in the year are paid at closing. (If six months have passed, eight months of taxes will be collected.)
Recording Fees and transfer taxes: This expense is charged by most states for recording the purchase documents and transferring ownership of the property. In Wisconsin it is paid by the seller and costs $3 per $1000 of the sale price.
Many of these charges vary based on where you decide to obtain a loan or if you're paying cash for a property. These costs will vary dramatically depending on the loan program you choose. A good loan officer will review all the best loan programs that fit your situation and go over all of the estimated charges in a document called a "Good Faith Estimate". For example, an FHA loan has an up-front mortgage insurance premium of around 2%, that is often added to the loan amount. Conventional programs may not have any up front charges. Some appraisals cost $300-$500, but can easily go over $1000 for commercial or multi-unit residential properties. In our experience, it's usually a good idea for home buyer's to budget an extra $1500 to $3000 for closing costs and pre-paids. Sometimes these costs can be negotiated into an offer to purchase for the seller to pay. You should discuss with your agent the best negotiation strategy to determine if you should ask for closing costs or not.