Closing costs represent the frequently overlooked amount of money associated with buying a house, mortgage related fees, property related fees and closing documents. These are thousands of dollars in fees, typically adding up to 2-5 percent of the loan principal. Various closing cost components exist and they usually vary from country to country, while some of these closing related costs can be negotiated by the borrower. All of the costs associated with closing a real estate transaction are just as important as down payment and should be considered and added to the closing price of the transaction. But what are they exactly and how do they work?
Closing costs include appraisal, title search, credit check – how much you’ll have to pay depends on numerous factors, some of them being the location of the property and the home price. All of the closing costs are broken down to two groups: property-related fees and mortgage-related fees; the first covers the expenses associated with your lender evaluating the property you’re about to finance and the second covers the expenses of application processing.
- Appraisal fee: The appraisal fee covers the costs of an authorized professional who has the job of determining the home’s worth before a lender extends a mortgage offer. Price estimates of a single-family home typically ranges from $300 to $450, while larger homes might have higher fees.
- Home inspection fee: Apart from hiring a professional for the appraisal, you should also consider hiring a professional inspection of the property you’re buying, which also costs a few hundred dollars.
- Title search: Lenders will usually hire someone to search local property records, just to make sure there are no issues with ownership and this fee costs around $450.
- Title insurance: Lenders usually require title insurance in case some issues pop up regarding the ownership after the sale. This serves as protection for the lender and it usually costs somewhere between 0,5 to 1 percent of the loan amount. Homeowners may obtain title insurance in order to protect their financial interest in the named property, which is an additional cost.
- Credit report fee: The credit report fee is a number the lender must charge in order to check your credit score and acquire a credit report; the fee is $25 or more.
- Origination fee: This fee might apply sometimes and it regards the initiation of the loan; it ranges up to $125.
- Application fee: Several hundred dollars is sometimes the cost of the processing of the application fee and might be charged by some lenders.
- Underwriting fee: This is also called an administrative or processing fee and it regards the verification and the evaluation of the mortgage. It might be around 0,5 percent of the entire loan amount. Some other charges are implied as well, also known as points and they are paid upfront. A large number of mortgages give the borrower an option to pay points in order to lower the interest rate on the loan.
- Local fees: Additional charges might exist in certain cities or states which do not apply in others. Be sure to do the research before going into the buying process.
- Legal fees: A lawyer is a definite necessity in this process and for most property deals, you will need to be represented by a lawyer at your closing. Real estate lawyers usually charge by the hour, and the rates vary broadly.
After applying for a mortgage, you will receive a loan estimate and a closing disclosure from the lender. The loan estimate serves as the evaluation of all mortgage related costs, including your payment taxes, closing costs and insurance with other home-related expenses. After settling on a lender, you’ll receive a closing disclosure which provides almost the same data as the loan estimate, but with exact numbers that can be expected for pay out at the closing and afterwards. These two documents are the most valuable when it comes to knowing and understanding closing costs.
Paying some of these fees is inevitable, but also, there are some that can be negotiated, which will in turn save you some money. Many of these fees are not set in stone and the lender has the ability to adjust them, according to an agreement; the only thing you need to do is ask for each of them individually. If it’s unclear what a specific fee covers exactly, be sure to ask the lender for the specific numbers or, if it doesn’t make sense, ask for the fee to be waived.
When it comes to the question of who pays the costs, traditionally, the buyer pays most of the fees, while some are covered by the seller; some of these can be negotiated, depending on the market. It is not unusual for the buyer to persuade the seller to split some expenses that are paid in advance, usually tax, flood and hazard insurance, property taxes and other. If selling the house is urgent, the seller might be willing to pay more of the closing costs. The key is to be patient, very thorough with the research and cautious when estimating closing costs, given that buying a house is lengthy and not a simple process. If it seems too complicated for you, be sure to contact a professional, who might be able to help you with figuring out the numbers.