All About Closing Costs: Why They’re Important, Who Pays For Them, And When They Are Paid

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.
•Attorney’s fees. 
•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.
•Appraisal fee.
•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.

Closing Costs Calculator – MyFICO

Closing Costs Q&A – Realtor.com

Closing Costs and Fees Explained – QuickenLoans

One thought on “All About Closing Costs: Why They’re Important, Who Pays For Them, And When They Are Paid

  1. More about closing costs:

    When you “close” on a property, you finalize all of the paperwork and settle all of the outstanding fees and charges. This is also when ownership is transferred from the seller to the buyer. All of the fees accumulated during the mortgage process must be paid on closing day.

    Your costs will vary based on three factors:
    (1) the lender you use,
    (2) the state in which you reside, and
    (3) the size of your mortgage loan. Location has a lot to do with it.

    When you apply for a mortgage loan, the lender is required to give you a document known as the Good Faith Estimate (GFE). As the title implies, this document gives you an estimate of your total borrowing costs. It includes an itemized list of fee and charges, along with the amount.

    There’s a good chance you’ll pay more on closing day than the lender estimates in advance. But this document is still useful as a planning tool. If a particular fee ends up being more than ten percent higher than originally estimated, the lender must pay the difference. So they have an incentive to be as accurate as possible with the Good Faith Estimate.

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