Understanding Closing Costs

First-time home buyers are often shocked when they see the list of closing costs they must pay when purchasing a home.

What are Closing Costs?

Some of these fees are charged by the mortgage company, while other fees are payable to different parties. Your realtor should explain all of this to you, as well as give you an estimate of what your costs may be.

Since these costs can be significant, you will need to budget for them ahead of time. Here are the basic charges you can expect to pay:

Application Fee:

This is charged when you first apply for your mortgage and is a non-refundable fee. It covers the lender’s costs of completing your initial paperwork and perhaps pre-approving you for a certain amount.

Appraisal Fee:

Your lender will require an appraisal of the house before funding your mortgage. They want to be sure that the house is worth what you are paying for it. Expect to pay a few hundred dollars for the appraisal.

Home Inspection Fee:

This is usually optional and you’ll have to go out on your own to have it done. Any home you buy should be inspected by a licensed home inspector. If the house has electrical problems, mold issues, or is built on a shaky foundation, etc. you’ll want to know about these things before signing the paperwork.

Loan Origination Fee:

Lenders charge this fee to cover all of the administrative costs they incur in processing the loan. It is generally charged in the form of “points”. One point is equal to one percent of the amount borrowed. So if you are borrowing $250,000, one point is $2,500.

You can usually find a loan that offers low or no points, but the interest rate will be higher. You may also be able to pay extra discount points to have the interest rate lowered.

Title Insurance:

This insurance generally costs from several hundred to several thousand dollars. It protects both you and the lender in case the person selling you the home does not legally own it. It’s possible there could be a lien on the home or another owner that is not present or not aware of the sale.

Homeowners Insurance:

Most lenders require that you prepay the first year’s homeowner’s insurance premium at closing.

Prepaid Loan Interest:

You’ll have to pay this to cover the amount of interest that accrues from the time your mortgage is funded until you make your first payment.

Private Mortgage Insurance (PMI):

If your down payment is less than twenty percent of the purchase price you will be required to pay private mortgage insurance. PMI protects the lender in the event that you default on the loan. You’ll be required to prepay a portion of this at closing.

Attorney Fees:

If you use an attorney’s services there will obviously be a fee.

Other Fees:

You can also expect to see some other random fees such as messenger fees, recording fees, and notary fees. These are all commonplace and not at all unusual.

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