Mortgage 101: What Are Closing Costs and Who Pays Them?
The Low Down on Closing Costs
While most homebuyers anticipate and understand several of the processes involved in buying a home, closing costs often remain somewhat of a mystery. Here, we take a glimpse behind the mortgage lender’s curtain for a closer look at what closing costs are and what they include.
What Are Closing Costs?
Closing costs are exactly what their name implies: they’re fees paid by the homebuyer at the time of closing. The typical closing cost is between 2% and 3% of the total loan amount being borrowed, although the amount you’re going to pay isn’t calculated on a percentage basis, but rather an accumulation of specific line items and lender fees. For some, this can be an expensive surprise on closing day if they’re not prepared.
Closing costs can include a wide range of fees based on the lender’s policies and practices so make sure to check the Good Faith Estimate for a list of these fees, which may include:
- Credit check fee
- Land survey fee
- Property appraisal fee
- Attorney fees
- Loan application fee
- Loan origination fee
- Fees for title services
- Lender’s title insurance premium
- Owner’s title insurance premium
- Government recordation fees
- Transfer taxes
Does The Homebuyer Always Pay Closing Costs?
In most standard home sales, the buyer is responsible for paying all of the closing costs. However, the buyer may be able to negotiate having someone else pay these costs, such as the seller. In some cases, a seller who is eager to sell their home may even volunteer to pay the closing costs in an effort to make their property more attractive to potential buyers.
What Are Loan Discount Points and How Do They Affect Closing Costs?
Some lenders offer homebuyers the ability to pay “points” in order to gain lower interest rates on their mortgage loans. These are called “discount points” and each point a buyer agrees to pay is approximately equal to 1% of the loan amount. If you accept a loan agreement with discount points, then you will pay the point or points at the time of closing, on top of closing costs.
What Other Fees Are Paid at the Time of Closing?
Aside from closing costs and discount points, most lenders require homebuyers to pay a certain amount of money into an escrow account at the time of closing. The funds in this account are used to cover a portion of the property taxes and homeowners insurance for your new home. Moving forward, these bills will be estimated and included in your monthly mortgage payment. This way, when your insurance and tax bills are due, they’re paid by the lender using the funds in your escrow account. On closing day, you will also be responsible for paying your first year of your homeowner’s insurance policy in full. Another fee to be paid on closing day is the prorated payment for interest on your mortgage from your closing date through the end of the current month. This amount varies depending on the day of the month you close. If you are buying a home or condominium in a community that is governed by a homeowners association, then you will also be responsible for paying their fees. Check with the lender about these requirements.
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