If you have never purchased a home before you probably have heard of closing costs but you are not sure what they really are.
As a buyer, most of your closing costs are going to be associated with the costs of financing your purchase. The total of your closing costs will vary depending on the home you buy, where you are buying your home and the type of financing you obtain.
Your agent can offer you a choice of lenders to contact. The sooner you determine not only how much home you can afford, but also are able to estimate how much your closing costs will be, the more focused you can be in your search.
The main categories of closing costs are:
This is the deposit or earnest money you pay towards the purchase of the home and any additional funds you agree to add prior to or at closing.
Costs payable in connection with the loan:
Discount Points to buy down the interest rate. If you want to reduce the monthly cost of your payments over the life of the loan, you should consider this optional fee. Paying this fee upfront can reduce the interest rate over the life of your loan. Review this option with your mortgage professional to see what is right for you.
Origination Costs. These are costs and fees for “originating” your loan. The “Origination Fee” covers the lenders cost of obtaining the financing and the administration of your loan. It can be either a percentage of the loan or a flat fee. These fees vary with lenders so be sure to compare the fees before deciding on a lender.
Appraisal Fee. Before approving the loan, your lender will want to be sure what your home is really worth.
Credit Report. Lenders will run a credit report on the applicants. This cost is passed on to the borrower.
Other. Some other fees you may pay are: lender required inspections, mortgage insurance, flood certification, etc.
Items to be paid in advance:
Your lender will require certain expenses to be paid in advance. You will be expected to pay interest on the loan from the date of the closing until the first mortgage payment is due. If you are required to have mortgage insurance the lender will require an advance payment. Many lenders will also require the homeowners’ insurance be paid for a full year in advance. Depending on the location of your home you may also need to carry flood insurance and will need to prepay the first year’s premium.
Depending on when taxes and insurances are due will determine the amounts the lender will want escrowed at closing. In addition to principal and interest payments each month the lender will be “escrowing” funds to pay for future obligations such as real estate taxes, insurance premiums and possibly even Home Owners Association dues and or assessments.
These are costs associated with the documentation of ownership of the property, and may include costs associated with title insuranc, to convey clear title to the property at closing, andrecording and transfer fees to cover recording the deed in your name. Attorney fees will also be included here.
If you had requested a survey, pest inspection, or other inspections and did not pay for them directly, these costs will be part of the closing costs.
Credits to/from seller:
At closing you will also be required to pay any costs paid by the seller that extend beyond the closing date. An example would be when the seller has paid the real estate taxes for a period that extends beyond the closing date. The seller is entitled to receive a credit for the portion of the period for which they no longer own the home. Conversely, the buyer would be entitled to a credit if the taxes are paid in arrears. The buyer would get a credit for the period covered before the closing.
Remember to work closely with your agent. It is particularly important in the early stages of your search for a home to estimate what the closing costs will be. Closing costs can easily represent thousands of dollars and can affect your search.
If you are in the market to buy a home or just considering your options, it costs nothing to learn more. Call or email Linda for a free, no-obligation, no pressure consultation – 910.409.3519, Linda@LindaMehner.com.