What Are Closing Costs?

The seller accepted your offer. Your loan is approved. You are ready to move in.

There is one step left: the closing. And for most buyers, it is the least understood part of the entire process.

The closing is the legal transfer of ownership from seller to buyer. You will sign a significant amount of paperwork and present a check that covers your down payment plus closing costs. Those costs are where buyers are most often caught off guard, not because they are hidden, but because no one took the time to explain them.

Here is what you are actually paying for.

Appraisal Fee. Covers the formal valuation of the property. If you paid this when you applied for your loan, you will not pay it again at closing.

Credit Report Fee. Covers the cost of the credit report your lender pulled during the application process. This is also sometimes collected upfront.

Loan Origination Fee. The lender's charge for processing your mortgage. This is typically one percent of the total loan amount.

Loan Discount Points. If you chose to buy down your interest rate, this is where that cost appears. Each point equals one percent of the total loan and is a one-time charge.

Title Insurance Fees. This covers the title search, title examination, insurance against title defects, and document preparation. It protects you from ownership disputes that could surface after the sale.

PMI Premium. If your down payment is less than 20 percent, your lender will require private mortgage insurance to protect against default. Once you reach 20 percent equity in the home, you can typically apply to have this removed.

Prepaid Interest. This covers the interest that accrues from your closing date to the date of your first mortgage payment. Buyers who close early in the month pay more here than buyers who close near the end of the month.

Escrow Accounts. In many areas, your lender will establish an escrow account to collect funds for property taxes and homeowner's insurance. At closing, expect to prepay at least one year of insurance plus two months as a cushion, along with a portion of property taxes based on where you are in the calendar year.

Recording Fees and Transfer Taxes. Most states charge a fee to record the sale and formally transfer ownership. The amount varies by location.

Two things worth knowing before you get to the closing table.

First, these fees vary by location and by lender. Work with a local real estate professional who can give you a specific number for what to expect in your market.

Second, closing costs are negotiable. During the offer stage, you can ask the seller to cover some or all of the settlement costs. In many transactions, sellers agree to do exactly that.

We can walk you through every line of your closing disclosure before you sign anything. Contact us and we will make sure you know what you are paying and why.