What Are Closing Costs?
When a person gets a mortgage, they will most likely be required to pay closing costs. Closing costs are fees, charged by lenders and third parties, in relation to the purchase of the home. Along with owing the lender the down payment on the property, the principal, and interest related to the mortgage, the buyer will also owe the lender and third parties closing costs, which are usually paid at the time that you close on your mortgage. A majority of the time, it is the buyer who pays the closing costs, rather than the seller,although on some loans such as VA loans, the seller does pay a portion of these costs.
What charges go into your total closing costs?
Closing costs vary widely based on where you live and the property you buy. Closing costs often include things such as:
*A fee for running your credit report.
*A loan origination fee, which lenders charge for processing the loan paperwork for you.
*Charges for any inspection required or requested by the lender or you.
*Discount points, which are fees you pay in exchange for a lower interest rate.
*Survey fee, which covers the cost of verifying property lines.
*Title insurance, which protects the lender in case the title isn’t clean.
*Title search fees, which pay for a background check on the title to make sure there aren't things such as unpaid mortgages or tax liens on the property.
*Escrow deposit, which may pay for a couple months' property taxes and private mortgage insurance.
*Pest inspection fee.
*Recording fee, this is paid to a city or county in exchange for recording the new *land records.
*Underwriting fee, which covers the cost of evaluating a mortgage loan application.
How much will you pay in closing costs?
Typically, home buyers will pay between about 2 and 5 percent of the purchase price of their home in closing costs.
Lenders are required by law to give a good faith estimate (GFE) of what the closing costs on the home will be within three days of when you apply for a loan. But it is important to remember that these are just an estimate, and many of the fees listed on the GFE can legally be changed by up to 10 percent. This has the potential of adding thousands of dollars to the final closing cost bill. Within a day of your closing, the lender should give you a HUD-1 settlement statement, which outlines closing costs. Compare this to your GFE and ask the lender to explain what item on your closing costs is and why it is necessary. Often, many of the fees that make up closing costs are negotiable, and some are completely unnecessary, especially things such as high administrative, mailing or courier costs charged by your lender. If the closing costs come in high, you can walk away from the loan; there are plenty of lenders who might be willing to offer you lower closing costs.
How can home buyers avoid closing costs?
Buyers may be able to avoid upfront closing costs by getting a no-closing cost mortgage, in which they won’t pay any of the closing costs when they close on the mortgage. Typically, when a lender offers a deal like this, it does end up costing them in the end: The lender may charge a higher interest rate on the loan for not paying closing costs, or the lender may wrap the closing costs into the total mortgage owed, in which case the buyers do end up paying interest on the closing costs. Finally, home buyers can negotiate directly with the seller who pays the closing costs. Sometimes sellers will agree to assume all or part of the buyer's closing costs, especially if it is a good offer.