Closing Costs Explained
One of the more stressful aspects of becoming a homeowner is the paperwork you face at closing. Having an experienced, full-time real estate agent by your side makes the process much easier and ensures you don't get hit with unexpected closing costs.
When a buyer and seller agree on a price and the terms for a property sale, the purchase documents are taken to a an impartial third party, the escrow company, to handle the transfer of ownership. Escrow companies ensure that all the terms of the sale are complete before the property and money exchange hands.
Closing costs are the fees that both buyer and seller pay to legally transfer the ownership of the property. The buyer and seller are usually given a list of these fees with an estimated dollar amount as part of the escrow process.
Typically, closing costs cover the services provided by attorneys, appraisers, inspectors, agents and other itemized taxes or products needed to make the sale legal. As a buyer, you will also have fees charged by your lender to set up your home loan. The start-up fees due at closing are in addition to your down payment, so make sure you know what they’re going to be as part of your loan application process.
It’s a good idea to get familiar with the basic fees early on. A cost comparison of lender’s fees is a good way to shop for a home loan. Ask each prospective lender to give you a written Good Faith Estimate that will spell out exactly what you can expect to pay on closing day.
Costs associated with getting a loan:
- Loan Origination Fee — Covers the administrative costs of processing the loan.
- Loan Discount Points — Discount points refer to a fee you pay in order to purchase a lower interest rate. Generally one point equals one percent of interest. Sometimes, points are lumped together with the loan origination fee.
- Appraisal Fee — Fee for the property appraisal that is used as the basis of the loan.
- Prepaid Interest — Buyers are required to pay the interest that accrues on the loan from the date of settlement to the first monthly payment. This amount is added as a closing cost.
- Credit Report Fee — Lenders look at your credit report to see your FICO score, and the details of how well you handle credit. Many lenders will waive this fee.
- Document Preparation — Covers the cost of preparing the legal documents required for closing the sale, including any special documents that may be necessary and agreed upon by the buyer and seller.
Most real estate sales include other fees, which depend on the type of loan, the land tenure, or the negotiated contract. All sales will also include escrow fees, homeowner’s insurance and property taxes. Read your Purchase Contract, talk to your lender, and ask your real estate agent to answer any questions you have.