Closing Costs Defined
Buying a house is not an everyday occurrence; the majority of homebuyers only transact 3 times over their lifetime, so there is little opportunity to familiarize yourself with the process and the various costs associated with the purchase of real estate. Closing costs are the funds that are due at closing, above and beyond your down payment amount. These vary for each transaction depending on a number of different factors including credit score, loan type, interest rate, etc. and are generally 2.5-3% of your loan amount. So, if your loan is $100,000 you can expect to pay approximately $3,000 in closing costs for that transaction. To help you better understand what these fees entail, I’ve outlined the broad strokes.
Prepaids & Prorations
Your closing costs are going to include a tax and insurance escrow which is a sum of money that is put into an account by your lender to pay the taxes and insurance on your property for the duration of the mortgage. Every month when you make a mortgage payment you are supplementing your tax escrow - this is a protection for the lender should you ever default on your payments. If you stop paying your mortgage the lender then is able to draw down your escrow in order to keep your payments current while they/you determine a path forward.
Prorations are most often associated with items that happen in the month of closing, for instance if you close on the 15th of the month and taxes and municipal billings have already been made, you are responsible for the remaining portion that month. Essentially you are paying the seller back for the portion of the expense associated with the days you are living in the property during the month of closing.
Loan Origination
Believe it or not, borrowing money isn’t free. While you are paying interest on your loan for the duration of the loan, the lender is also going to charge you for originating the loan. This line item is compensation for all the work that goes into underwriting and securing the funds that are associated with your loan. You will work with your Loan Officer leading up to your purchase and provide them with all the necessary documentation that goes into funding your mortgage.
Appraisal Fees
When you purchase your new property the lender is going to send out an independent appraiser to confirm the value of your property. They do this to ensure that the asset they are providing financing for is worth the amount of money they are lending in order to purchase it. For example, if you offer $300,000 on a home that is only worth $200,000 the bank would be taking on an unacceptable amount of risk and would reject the loan.
Title Fees
Title fees encompass things like title search, title insurance, title recording and the actual closing of the purchase. The title company is responsible for ensuring that when you purchase your property you are not inheriting any liens, or judgments that could possibly exist against the property. The title company is also acting as the middleman that holds and disperses funds pertaining to the transaction.
Hopefully this summary provides a foundational understanding of what to expect to pay in closing costs and what is associated with those costs. Should you have any questions please feel free to send me a message directly.