Closing costs are usually one of the last things a home buyer thinks about when purchasing a home. Although getting to the closing table and walking away with the keys to your brand new home is exciting, the actual closing costs associated with buying a home can be surprising if you’re not prepared.
You’ll go through a period called escrow when buying a home where the issues dealing with purchasing a home are sorted out. The closing signals the last day of the escrow period, and this is where you’ll pay closing costs when you actually buy a home.
There are different forms of closing costs. While some of these costs are minor, some are quite significant. This article looks at different types of closing costs so you’re prepared before sitting down at the closing table.
A third party whose job it is to double check everything and finalize a home sale, the escrow agent charges a fee for escrow services. The amount of this escrow fee varies depending on the mortgage company, real estate agent, and area, but it’s usually somewhere between a few hundred and a thousand to two thousand dollars. If you can, choose your own escrow agent to minimize the fees you’ll pay.
Home Insurance And Title Insurance
When you buy a home, getting title insurance and home insurance is smart. In fact, if you’re financing your home purchase with a mortgage loan, your mortgage company will require you to get title insurance and home insurance. Even if you’re lucky enough to pay cash for a home, getting insured is a great idea because it protects you if issues with your title come up, and will protect you in the event of home damage or disaster.
Depending on where you get your home loan, you may have to pay points as part of your closing costs. Points are fees typically built into a loan, but that can be a separate fee paid, that is essentially a fee assessed for being given the privilege of borrowing money. It sounds crazy, but it’s true. Each point paid is usually equivalent to 1% to 2% of your loan. For example, a 1% point fee on a $200,000 loan would be $2,000. Shop around for a lender that won’t charge you points to avoid this fee, especially if you have great credit.
PMI, also known as Private Mortgage Insurance, is usually a mandatory closing cost for loans where you put down less than 20% of the sales price of a home. While PMI is considered a closing cost, it’s something you’ll pay year after year unless you refinance your loan later after you have paid down at least 20%. PMI payments can total as much as several hundred dollars per year.
Prepaid fees fit into the closing costs of most loans and they include prepaying items like your mortgage interest and property taxes. Sometimes the interest on your first mortgage payment accumulates before you make your first payment so the mortgage company gets that interest as a prepaid closing cost. Since the seller paid property taxes on the home for the entire year, but sells before the year is up, you reimburse him for the property taxes he paid in the form of prepaid fee closing costs.
This is a fee charged by your local governing authority when they officially record the deed. Also called recording taxes, sometimes you can negotiate the seller to pay recording fees, but it’s usually attached to the buyer as a closing cost.
Miscellaneous Lender Fees
Miscellaneous lender fees include any extras the lender pays for, including a credit report fee, loan origination fee that covers the administration and financing of your mortgage, processing fee, underwriting fee, and even commissions. These closing costs can add up quickly, but many lenders will negotiate the payment of these miscellaneous fees with you. It never hurts to check.
Other Closing Costs
As part of the home buying process, you may have to pay other types of closing costs as well. Most of these extra closing costs have to do with validation of the property in the form of appraisals and home inspections. These fees are included in mortgage loans in some states, but not all.
There are many closing costs associated with buying a home, but if you know exactly what you’ll have to pay at the closing table, you won’t have a big surprise at closing that empties your bank account. Closing costs will also vary , depending on your locale, so it’s a good idea to consult with a real estate agent or lawyer beforehand.