Home Buyers What are Closing Costs and What is Included?
Understanding Closing Costs in Your Home Transaction
Closing costs make up 3 to 5 percent of the home loan and include different fees and expenses you pay when you close on your house, in addition to the down payment. Depending on the size of your loan, it can be a large chunk of money, so it’s important to account for these costs ahead of time. The following fees are included in the closing costs:
- Loan origination fees: These fees include the processing and underwriting of the loan, which can involve document preparation, notary fees, and the lender’s attorney fees. These fees cost around 0.5% of the loan amount.
- Appraisal and survey fees: These fees confirm the fair market value of your home. It’s important to verify that the amount you need for a loan is justified. The average cost of a home appraisal can cost between $300 and $400. Most lenders also require a home inspection, especially if you’re using an FHA loan.
- Title insurance: This fee is necessary to protect yourself in case title problems or claims are made on the home after closing. A title search may also be conducted to ensure that there are no outstanding claims or liens against the property.
- Homeowners insurance: The first year is generally paid at closing or is added onto the monthly mortgage bill. Homeowners insurance is required to obtain a loan and covers the property in case of vandalism, theft, and certain natural disasters.
- Private mortgage insurance (PMI): This is required if your down payment is less than 20 percent. PMI protects the lender against losses if you cannot repay your loan.
- Property tax: Buyers typically pay between 2 and 6 months’ worth of property taxes at closing. Taxes vary by location, but the property may be reassessed and the value could increase. The new amount may need to be readjusted.
- Closing or escrow fees: This fee goes to the escrow agent who helps you close. It can vary based on the purchase price of the home.
- Attorney fees: Some states require you to have an attorney at closing. Their fees will vary and may be bundled into your closing costs.
- Miscellaneous fees: Various other fees at closing include costs for credit checks, mortgage points, and other loan-related costs.
How Can I Reduce Closing Costs?
With so many fees, you might want to weigh your options to reduce some of those fees previously mentioned. Shop around and assess different lenders to find out which one can help save you money. If you’re unsure about certain fees, ask your lender. If they cannot clarify your loan details, keep searching. A closing date at the end of the month can also cut down on prepaid daily interest charges.