Home Loan Closing Costs Explained
As many of us know, buying a house costs a lot of money and it takes research and hard work to get the best deal while making sure that you are buying the right house. Once you have your mortgage chosen and are ready to buy, you discover that you have to pay closing costs on top of the other thousands and thousands you'll be spending. What are closing costs, why do we have them, what do they cover and which ones will you have to pay?
House Closing: Buying a Home
The last stage of buying a house is the closing. A house closing is the final real estate transaction during which the actual title to the property changes hands from seller to buyer. The closing is the finalization of a real estate contract, which, unfortunately for us home buyers, involves closing costs that are added on to the final agreed-upon price of the house. Though these closing costs are usually paid by the buyer (known as "buyer closing costs"), some costs are also paid by the seller (AKA "seller closing costs"), in many cases. Which party pays these costs can be negotiated prior to the closing; sometimes, the seller will pick up some or all of the closing costs to make a better deal for the buyer and sell his/her property more quickly.
How Much are Closing Costs?
House closing costs can be as expensive as several thousand dollars, so it's a smart idea to plan ahead for them when shopping for your home. Closing costs have to be paid up front, so you will need to save for them (or get a signature loan or something similar).
List of Closing Costs On a House
So what are all the different closing costs one might have to pay when buying a house? Below is a list of closing costs and an explanation for each. You will probably not have to pay ALL the fees in this list, but it is good to have an idea of the different possible closing costs to expect. Remember, closing costs may be paid by the seller if they are eager to sell. Try to negotiate and see where the seller stands on paying some or all of the closing costs.
Typical Closing Costs:
Appraisal Fees
A home should be appraised to determine its value before sale so that the seller gets a fair amount for their house and the buyer gets a fair deal. An appraisal is usually required before a home can be sold, but not always. The appraisal is not free -- an appraisal fee is usually paid by the buyer, though sometimes the seller pays for the appraisal. If you are buying a home and no appraisal has been made, you should ask why and make sure that the home is appraised so you know the fair value.
Attorney Fees (AKA Lawyer Fees)
Attorney fees may be paid by either the buyer or seller (or both), for careful preparation of legal documents. An attorney is usually required by lenders to make sure that legal documents are done correctly and officially.
Brokerage Fees (Brokerage Commission)
Brokerage fees are paid to the real estate broker to cover the broker's marketing, negotiation and sale assistance services. This fee is usually a percentage of the home's final sale price; the seller and broker should agree on the percentage before the sale is made. This may be a large closing cost.
Credit Report Fee
A credit report is usually required so that your lender can determine which interest rate to give out. If your FICO credit score is low, you will likely have a higher interest rate. This is done to protect the lender's investment against the likelihood of the loan defaulting.
Document Taxes
This is a government-required fee which may be paid by the buyer and/or the seller, depending on the location of the sale.
Down Payment
Not always considered a closing cost, the down payment is usually the biggest cost made at closing, though some down payments can be small or nothing at all, depending on the lender, credit score, mortgage agreement and other factors. The down payment is made by the buyer and creates immediate equity, or value, in the home.
Home Inspection Fees
Inspection fees are most often paid by the home buyer and go to home, pest or other inspectors who check the quality and integrity of different parts of the home (such as the foundation, plumbing, electrical, etc.) before sale to ensure that the home is in good shape and not a "lemon." The lender usually requires an approved inspection to assure good home value for the loan.
Loan Origination
The loan origination fee is very common and you will most likely be charged a loan origination fee at the time of closing. It is typically paid by the buyer, but the seller may pay this if the deal is arranged as such.
Application Fee (Mortgage Processing Fee)
This fee is paid to the lender by the buyer and covers the lender's loan application processing (printing and completing paperwork, retrieving signatures, etc.). The application fee may be paid at the time of the mortgage application or at the actual closing.
Points (Mortgage Points)
Points are generally only recommended for home buyers who plan to keep their homes for a long time. Points are considered to be a type of pre-paid interest, a way for home buyers to keep interest costs down for a certain length of time at the beginning of the loan, or to make a lower down payment. One point is equal to 1 percent of the loan principal.
Notary Fees
The notary fee is a simple legal fee paid to a notary public for notarizing the loan and/or sale documents at the time of sale.
Pre-Paid Property Insurance
A lender will usually require a buyer to keep property insurance on the home in question, and often will need the first year's insurance cost paid in advance.
Private Mortgage Insurance (PMI) Premium
PMI is optional for most mortgages, but required on some -- especially zero down payment home loans. Private mortgage insurance is a form of insurance that covers the lender in case you are unable to repay your loan.
Recording Fees
An amount charged for officially recording the home sale transaction by a government entity. Usually required during any real estate sale.
Surveying Fee
A survey of the land and buildings being traded is necessary for confirming the size of the land lot and building dimensions. Many lenders require this before closing.
Title Fees
The title fees cover title services including search, insurance and closing, and may be required during a home sale.
Remember to Plan for Closing Costs and Save
So remember to set aside some money (usually thousands of dollars) for the various closing costs you are sure to encounter, as well as those which may surprise you at the last minute. Good luck buying your new home!