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Understanding Closing Costs

Understanding Closing Costs

Closing costs are often daunting and undefined for home buyers and sellers. And when I say undefined, I just mean very little explanation is given and they are difficult to comprehend when you are in the middle of closing and signing papers so quickly that your head about spins off. Because not knowing something is often the greatest source of fear and stress, it is a great idea to know what the costs are so that you can relax and get excited about buying your home.

Each state, each lender, each title company and each closing are a little different, there may be some variations to the closing costs in your neck of the woods, but this will give you a pretty good idea. Of course, the first big ticket item that is paid at closing is the real estate agent(s) commission. It typically runs from 5%-7% of the asking price. If there are two agents, one for the buyer and one for the seller are in play, the commission will be split. These aren’t technically part of the closing costs.

From and To the Lender

 Origination Fee

As a buyer you will pay a loan origination fee which is basically you paying for all the labor and paperwork that went into securing your loan. This will cost approximately 1% of the loan.

Application

Lenders may charge an application free for them to even consider you for a loan. Frankly, you are also doing them a favor as well, so we suggest you avoid lenders who assess you for being a good customer.

Processing

Some lenders will also charge a processing fee on top of the origination fee which can be anywhere from $200-$1000 on top of the 1%, so ask your lender if they charge that fee—some don’t!

Underwriting

An underwriting fee of $200-$1000 is also charged to pay for the personnel who determined that you were a good candidate for the loan.

You will also be nickeled and dimed by a number of fees including tax service rates ($50) to make sure your home doesn’t have past tax debt. Flood certification is another $20 to identify whether or not your home is or isn’t in a flood plain. A wire transfer fee of funds will cost you $30. Your lender will likely choose the title company that will handle all the things associated with closing your loan and getting the keys and deed to your house. As your lender how much the title company charges charge.

Title insurance and title reports

A title company charges insurance and report fees for research necessary to make sure that there are no other titles out there on your home. This will insure your loan in case they missed something in their research. There is a lender’s title policy and an owner’s policy. The seller should pay for the owner’s policy while you will be responsible for the lender’s policy. Each of these could cost anywhere $400-$1600 or more so this is a big cost to be aware of.

Escrow

Escrow fees are the moneys paid to the company for handling all the funds and making sure everyone is paid correctly. This can cost from $300 to $700.

Credit report

A credit report is necessary from your lender, so you will be assessed that fee of approximately $30-$50.

Notarization

You will pay a notary fee of $150 for the authorization of deeds and documents.

Insurance

You will have to make sure that you have home insurance. You will also likely want to make sure that it is included as part of the mortgage each month. At closing you will likely be required to pay the whole year’s premium, but sometimes it can be prorated to you monthly. If you are in a flood plain, you will also have to pay flood insurance. Insurance will cost anywhere from $500-$1300. Mortgage insurance will also be required if you get a USDA, VA or Non-FHA loan and minimally, two months of premiums will be expected at closing.

Interest

Most lenders also expect you to pay the daily interest charges from the day of closing to the end of the current month.  This will be the percentage of your mortgage that is left for the month from the date of purchase.

A No-Closing Cost Mortgage

As a buyer, it can be a great idea to ask for a no-closing cost mortgage. This can be a wonderful way to minimize the sting of closing costs. Your lender will prorate out the costs so that you are paying a little each month rather than a big chunk upfront.  Some buyers would rather pay it all upfront since it can be worked into the loan, and that isn’t a bad way to go either especially since taxes and insurance will already increase the cost of your mortgage.

Negotiate

Also, as the buyer, you can certainly work in the negotiation of the closing cost fees with the seller. These negotiations are typically done by your knowledgeable and hard-working real estate agent.

Closing costs are a given, but now that you know what you are up against, and know the right questions to ask, hopefully you can relax as little. At the very least, knowing all this up front empowers you to search for a lender that is fair rather than just going with whom you know or your realtor’s recommendation.

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