What Are Closing Costs?
You've found your dream home, the seller has accepted your offer, your loan has been approved and you're eager to move into your new home. But before you get the key, there's one more step - the closing.
Also called the settlement, the closing is the process of passing ownership of property from seller to buyer. Check out our explanation of the closing process on our page Sale Pending - The Next Steps. It can be somewhat stressful, but we are here to help! As a buyer, you will sign what seems like endless piles of documents and will have to present a sizeable check for the down payment and various closing costs. It's the fees associated with the closing that many times remains a mystery to many buyers who may simply hand over thousands of dollars without really knowing what they are paying for.
As a responsible buyer, you should be familiar with these costs that are both mortgage-related and government imposed. Although many of the fees may vary by loan type and lender, here are some of the more common fees:
1) Appraisal Fee
This fee pays for the appraisal of the property. You may already have paid this fee at the beginning of your loan application process.
2) Credit Report Fee
This fee covers the cost of the credit report requested by the lender. This too may already have been paid when you applied for your loan.
3) Loan Origination Fee
This fee covers the lender's loan-processing costs. The fee is typically one percent of the total mortgage.
4) Loan Discount
Sometimes called points. You may elect to pay this one-time charge in exchange for a lower your interest rate. Each point you purchase equals one percent of the total loan. Ask your lender if this option makes sense for you.
5) Title Insurance Fees
These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous title fees. Title insurance guarantees your ownership of the property. A wise man once said "I wouldn't buy a dog house without title insurance." That's good advice. You always want to have a title search and title insurance on your home purchase.
6) PMI Premium
If you buy a home with a low down payment (typically anything less than 20%), a lender usually requires that you pay an upfront and monthly ongoing fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once a new owner has 20 percent equity in their home, however, he or she can normally apply to eliminate this insurance, but not with all loan programs. Check with your specific lender to be sure.
7) Prepaid Interest Fee
This fee covers the interest payment from the date you close on your new home to the date of your first mortgage payment. Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it towards the end of the month.
8) Escrow Accounts
Your mortgage lender will very likely start an escrow account that holds funds for future annual property taxes and homeowner's insurance payments. At closing, you will pay into this escrow account so the lender will have enough funds available to pay your annual homeowner's insurance premium and property taxes as they come due. Your lender or settlement company can better explain how these escrow funds to be collected from you are calculated.
The lender is governed by fairly strict laws on these escrow accounts so they aren't allowed to withhold too much of your money, but just enough so your taxes and insurance can be paid from it. Also, part of your regular monthly payments will include escrow payments to add into this fund so monies are available the next time the property taxes or your insurance premium is due. Your lender will then pay your homeowner's premiums and property taxes from these escrow monies as they come due throughout the years. Keep that in mind if the tax bills or homeowner's insurance premium notices get mailed to your residence. They should be directed to your lender for payment.
9) Recording Fees and transfer taxes
Recording fees are charged for recording the new deed, mortgage and note (your written promise to repay to loan) at the recorder's office of the county courthouse where your home is located. There are also transfer taxes to be paid. Most counties in PA charge a 1% transfer tax and the State of PA charges an additional 1% equaling a total of 2% in transfer taxes due at closing. This 2% one-time transfer tax is typically (but not always) split equally between buyer and seller, so you will probably pay a 1% transfer tax at closing.
Is there an EASY way to get a good idea of my total closing costs?
Yes, your mortgage lender should provide to you with a Loan Estimate Form (sometimes called a Good Faith Estimate) itemizing your closing costs. That's another good reason to get pre-approved, so you know these costs in advance of looking at homes. Keep in mind that you can negotiate these costs with the seller during the Making an Offer stage through Seller's Assist. In some instances, the seller might even agree to pay some or even all of your settlement costs. Conditions may apply, so check with your agent to be sure.
You can also get a ball park estimate of your closing costs by using a simple formula. We should note that this formula is APPROXIMATE and functions only when calculating closing costs on a loan with NO MORE THAN 20% down payment. It works like this: Closing costs are roughly equivalent to 5% of your loan amount, not purchase price. So for example, if you are buying a house for $100,000 with 10% down payment, your loan amount would be $90,000. 5% of $90,000 is $4,500. So your approximate closing costs would be $4,500 and your down payment would be $10,000 for total cash needed for this purchase of approximately $14,400. This example assumes no seller's assist is involved.
You can also calculate your approximate monthly mortgage payment using our Mortgage Calculator.