What Are Closing Costs?
Closing costs are one of the main things we hear buyers are confused about during the offer-writing process. Here’s some general info on what closing costs include so that you’ll be ready when the time comes!
What Are Closing Costs?
Closing costs are fees paid when you refinance or transfer ownership in real property. They are paid (usually) by both the buyer and the seller on the settlement date. These fees are highly variable, due to many factors including the property’s purchase price, services needed during the purchase process, utility adjustments and local and state taxes. Generally, closing costs range anywhere from 2% to 5% of a property’s selling price. Talk to your lender before making an offer about closing cost estimates so that you can adjust your offer accordingly!
By law, lenders are required to give you a loan estimate within three days of receiving your application. This document sets out what your closing costs will be. These fees, however, are not set in stone. Your lender should provide a closing disclosure statement at least three business days before the closing date which will be a more reliable estimate of your closing costs. Make sure you read and understand this closing disclosure and ask your lender if there are any significant changes from the initial estimate you received!
Everyone’s closing costs will be different depending on their own transaction so take any “helpful advice” from parents or friends with a grain of salt. Some examples of typical costs include:
- Credit report fees (the cost of checking your credit record)
- Loan origination fees (which consists of the cost to your lender for processing your loan)
- Attorney fees
- Inspection fees (for inspections requested by either you or the lender)
- Appraisal fee
- Survey fee (so that both you and the lender know where your property boundaries lie)
- Escrow deposit which may cover private mortgage insurance and some property taxes
- Pest inspection fee
- Recording fee paid to a county or city authority to file a record of the property transfer and/or new mortgage lien against the property
- Underwriting fee to cover the cost of processing a loan application
- Discount points (money you pay your lender to get a lower interest rate)
- Title insurance (protection for you and the lender should there be any issues with title to the property)
- Title search fees (costs incurred by the company who checks the title on the property)
Can I Add my Closing Costs to the Loan?
Most loan programs will allow for a percentage of the purchase price to go towards closing costs. You can either ask for a seller credit or a lender credit towards the closing costs. Asking for a seller credit is more appealing to the seller if you offer a higher purchase price–the seller won’t lose any money and you can use the seller credit towards the closing costs. In this scenario, what you’re doing is financing your closing costs over the life of the loan.
With a lender credit, you agree to a higher interest rate so that the lender will pay some of the closing costs. You can potentially get a lender credit of $2,000 to $4,000–a nice chunk of change! Keep in mind, however, that you’ll eventually pay more over the life of the loan than if you had just paid upfront!
What Can I Expect?
Before the big day, pull together any paperwork and keep it on hand for easy reference. Be prepared to take your time reading through all of the closing documents. Make sure you completely understand all of the terms you’re agreeing to. If some of the terms are missing or incomplete, don’t sign until they’re fixed.
Your lender will send money to the closing agent via a wire transfer and may require that you set up a new escrow account with them to pay your property taxes and homeowners insurance together with your monthly mortgage payment. You should be advised before closing day how much money you’ll need to have for closing, but bring your checkbook with you to cover any incidental closing costs.