What are Closing Costs?
Understanding Recurring and Non-Recurring Closing Costs
Closing costs are any costs associated with closing a real estate transaction, and include escrow and loan costs. This amounts to approximately 10% of the total sales price of a home.
These charges usually include a real estate commission (Seller pays only), loan fee, escrow charge, title insurance premium, pest and other inspections, and costs for other miscellaneous services provided during the closing or escrow process. Click here for the escrow timeline!
A percentage of the selling price of the home and usually paid by the seller (usually between five and six percent split equally with cooperation broker).
These are fees that the lender(s) charges to process, approve and make the mortgage loan.
LOAN ORIGINATION FEE
This is sometimes called a “point” or “discount points.” A loan discount is a one-time charge imposed by the lender or broker to lower the interest rate at which the lender or broker would otherwise offer the loan to you. Each “point” is equal to one percent of the loan amount.
The appraisal fee pays for a statement of property value for the lender, made by an independent appraiser or by a member of the lender’s staff. The appraiser inspects the house and the neighborhood, and considers sales prices of comparable houses and other factors in determining the value. For example, if you are looking to take out a loan, the lender will order an appraisal. If the home comes in lower than the appraised price, the buyer can either go back to Seller to negotiate price, pay cash, or move on. A lender will not lend on a home that is worth less than the loan.
CREDIT REPORT FEE
The cost for a credit report, which shows your credit history. This is a very minor fee.
MORTGAGE INSURANCE APPLICATION FEE
The fee covers the processing of an application for mortgage insurance which may be required on certain home loans.
A fee charged when a buyer “assumes” or takes over the duty to pay the seller’s existing loan.
Lenders usually require that borrowers pay at the close of escrow the interest that accrues on the loan from the date of funding to the beginning of the period covered by the first monthly payment.
PMI (MORTGAGE INSURANCE)
Mortgage insurance protects the lender from loss due to payment default by the borrower. The lender may require the first premium or a lump sum premium, covering the life of the loan in advance, in escrow. With this insurance protection, the lender is willing to make a larger loan, thus reducing your down payment requirements. This usually happens when a borrow puts down less than 20% on a home loan.
HAZARD INSURANCE PREMIUM
The premium prepayment is for insurance for you and the lender against loss due to fire, windstorm, and natural hazards. The coverage may be included in a Homeowner’s Policy which insures against additional risks such as personal liability and theft. Often the first year’s premium is prepaid in escrow. The policy may not protect against loss caused by flooding. If your mortgage is federally insured and your property is within a special flood hazard area identified by FEMA, you may be required by federal law to carry flood insurance on your home.
These may cover a variety of services performed by title companies and others and include fees directly related to the transfer of title and fees for recording, transfer tax, notaries, etc. The borrower may pay all, a part or none of the cost for owner’s and lender’s title insurance depending on the terms of the sales contract or local custom. A one-time premium may be charged for the lender’s title policy which protects the lender against loss due to problems or defects in connection with the title. The insurance is usually written for the amount of the mortgage loan. The borrower will be responsible for all, part or none of the cost depending on the sales contract or local custom.
The fee for the services preformed by the escrow officer. Typically responsibility for payment of this fee is negotiated between buyer and seller when the sales contract is signed.
RECORDING AND TRANSFER FEES
The sales contract or local custom determines how fees are split between buyer and seller. The buyer usually pays the fees for legally recording the new deed and mortgage loan. The county charges a transfer tax and many cities also have transfer tax fees
PEST AND OTHER INSPECTIONS
This fee is to cover inspections for termites or other pest infestation of the home, payment determined by sales contract or custom