When closing, or settling a mortgage, there are a variety of fees that you, as the buyer, are responsible for. It is important to know approximately how much you should expect to pay for closing costs. The average amount paid for closing costs is three percent of the cost of the loan, but it can range from one percent up to six percent.
The most important thing to realize about closing costs is that they can often be negotiated. Most people do not give much thought to all of the costs associated with closing on the loan, because the fees are rolled into the loan rather than coming directly out of pocket. Still, several thousand dollars over the life of the loan adds up to a substantial amount of interest. Knowing what to expect in closing costs is one way to reduce your expenses.
Fees that Generate from the Lender
An application fee is the first fee that you can expect to pay when borrowing for a home. The application fee covers the initial cost of checking the credit report of each loan applicant and filling out the initial paperwork. An underwriting fee or loan-originating fee is also part of the initial closing costs from the lender. This fee compensates the lender for working with you through the loan process and covers the cost of document preparation, the cost of having documents notarized and the fees paid to an attorney for legal paperwork.
A lender also charges points. Points are used to lower the interest rate of your loan. One point is the equivalent of one percent of the loan amount. You can close a loan with no points, or decide on paying one to three percent of the amount of the loan in points. The lender will pay to have the home you are purchasing appraised and often inspected. These fees are added to the closing costs charged by the lender. The lender will also determine how much the interest is on your loan before you make your first payment. This prepayment of interest is common, and happens because there can be up to two months after closing before the first mortgage payment is due.
Fees for Transfer of Ownership
When the ownership of a home changes hands, there are a variety of expenses due to keep the paperwork in legal compliance. A title search is conducted to ensure that the person selling the property has the legal right to sell, and there are no outstanding liens on the property. There is always the chance that the title search company or attorney who conducted the search may make a mistake.
Some courthouses have all of their records computerized, while others require a visit to the courthouse in person and manual search. To protect the lender from errors, many require that the borrower purchase title insurance. Title insurance is a one-time purchase that is rolled into the closing costs.
There are a variety of miscellaneous fees that can raise the cost of purchasing a home. The fees vary depending on the type of loan you are taking on and the area where you live. They can even vary from lender to lender.
An assumption fee is charged when the borrower takes over an existing mortgage. When this happens, the mortgage company charges the borrower a fee of up to one percent of the amount of the loan.
Certain lenders will require different types of home inspections. Some will want testing for water quality, some for radon and others for structural damage. The requirements depend on the lender as well as the location of the home.
Some lenders require that the borrower place money in an escrow account. The money in this account is held to cover the cost of repairs or other expenses. Similar to escrow account funds are closing cost monies that are designated to pay costs split between the buyer and seller. These are negotiated, but some expenses that are commonly split include prorated property taxes, annual homeowners' fees and any other fees that are typically paid in one lump sum.
Closing costs can be very expensive. It is important to understand exactly what you are being charged, and shop around to determine if other lenders will charge you less. Some lenders, for example, require a variety of very extensive home inspections, while others choose what type of inspections are required by the location of the home and known issues in the area.
Once you have chosen a lender and know how much to expect for closing costs, it is wise to consider paying some or all of the costs out of pocket rather than having them rolled into the cost of the loan.
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Mike Cole is a freelance writer who writes about the mortgage industry, often focusing on a specific topic such as mortgage interest rates.
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