Many people wonder what closing costs are. Everyone knows the term, but not many people know exactly what it means. Well, closing costs are fees that are associated at the closing of a real estate transaction. The closing point is when the title of the property is transferred from the seller to the buyer. Closing costs are incurred by either the buyer or seller. What charges go into your total closing costs? Closing costs vary widely based on where you live and the property you buy. They often include things such as:
•A fee for running your credit report.
•A loan origination fee, which lenders charge for processing the loan paperwork for you.
•Charges for any inspection required or requested by the lender or you.
•Discount points, which are fees you pay in exchange for a lower interest rate.
•Survey fee, which covers the cost of verifying property lines.
•Title Insurance, which protects the lender in case the title isn’t clean.
•Title search fees, which pay for a background check on the title to make sure there aren’t things such as unpaid mortgages or tax liens on the property.
•Escrow deposit, which may pay for a couple months’ property taxes and private mortgage insurance.
•Pest inspection fee.
•Recording fee, which is paid to a city or county in exchange for recording the new land records.
•Underwriting fee, which covers the cost of evaluating a mortgage loan application.
How much are closing costs?
Typically, home buyers will pay between about 3-8% of the purchase price of their home in closing fees. Lenders are required by law to give you a good faith estimate (GFE) of what the closing costs on your home will be within just a few days after you apply for a loan. But these are just an estimate, and many of the fees listed on the GFE are subject to change.
Within a day of your closing, the lender should give you a settlement statement, which outlines closing fees. Compare this to your GFE and ask the lender to explain what each line item on your closing costs is and why it is needed. Often, many of the fees that make up closing costs are negotiable.
Can you avoid these costs?
Well, sometimes. One way that you can also avoid upfront fees is by getting a no-closing cost mortgage, in which you don’t pay any of the closing costs when you close on the mortgage. Typically, when a lender offers a deal like this, they may charge you a higher interest rate on the loan for not paying closing costs, or they may wrap the closing fees into the total mortgage owed, in which case you end up paying interest on the closing costs. Finally, home buyers can negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees.