What Are Closing Costs?

You're on the verge of owning your dream home; the seller has agreed to your offer, your loan is approved, and you can't wait to move in. But, there's a crucial step remaining - the closing.

The closing, or settlement, is the process where the property's ownership shifts from the seller to you. It involves a lot of paperwork and significant payments - not just for the down payment but also for various closing costs. Understanding these fees, which include both mortgage-related and government-imposed charges, is vital for every buyer. Here's a guide to some of the common fees you'll encounter:

Appraisal Fee: This fee is for evaluating the property's value. It's possible that you paid this at the start of your loan application.

Credit Report Fee: The cost for the credit report your lender needed. Like the appraisal fee, you might have covered this early in your loan process.

Loan Origination Fee: This covers the lender's expenses for processing your loan, generally about one percent of your mortgage's total.

Loan Discount: This is a one-time fee if you've chosen to buy points to reduce your interest rate. Each point equals one percent of your entire loan.

Title Insurance Fees: These include costs for searching the title, examining it, insuring it, preparing documents, and other related fees.

PMI Premium: If your down payment is low, your lender may require mortgage insurance, protecting them in case of foreclosure. Once you have 20 percent equity in the home, you can typically request to drop this insurance.

Prepaid Interest Fee: This fee covers the interest from when you buy the home to when your first mortgage payment is due. The amount depends on your purchase timing within the month.

Escrow Accounts: Common in certain areas, lenders may set up an account for future property taxes and home insurance, collecting a year's worth plus a couple of months' insurance premiums and taxes.

Recording Fees and Transfer Taxes: Most states charge these for documenting the sale and transferring the property.

Consult a real estate professional in your area to understand precisely which fees you'll need to pay at your home's closing. You can often negotiate these costs with the seller during the offer stage, and sometimes, the seller might even agree to handle all settlement costs.