Closing costs are the final financial hurdle before becoming new homeowners. These cover a range of items, so we’ve created this guide to help you break down your “Closing Disclosure,” the itemized receipt, if you will, of your fees and how to better understand them.
Closing costs can run between 3%-6% of your loan amount depending on the location of your future home, your lender, service providers, and the settlement agent. Down payments are not included in your closing costs. Do your research, and find the mortgage company that understands your financial situation while providing exceptional guidance through the buying or refinancing process. Saving just a little bit on your closing costs can help you purchase something more important to you – like covering your moving fees or buying a new piece of furniture.
Below is a glossary of different fees that could possibly be included in closing costs:
Administration Fee: Like all professionals, the lending team must be compensated for their time and efforts. This fee goes to your lender and covers the costs of processing and underwriting your loan. Administration fees are applied whether you are buying or refinancing.
Appraisal Fee: If an appraisal is required, the appraiser must be compensated for their time and expertise. The appraiser will visit the house and provide a detailed report to the lender that provides information about the property and its market value. This is part of the loan approval process and provides protection for both the borrower and the lender from a loan-to-value standpoint.
Settlement Fees: The settlement fees or “closing fees” are the costs charged by the title company for closing the loan, document preparation, and title research. The title company will perform a title search and provide protection to both the borrower and the lender, ensuring that a clear title will be given to the home.
Discount Points and Fees: This prepaid interest plan allows you to buy down your interest rate. The cost is typically expressed as a percentage of the loan amount. For example, a 1% discount fee on a $300,000 loan would cost $3,000. A loan with discount fees would have a lower interest rate than a loan that did not have any discount fees. Buying down the interest rate on the front end could save you money as you pay off your loan in the years to come.
Recording Fee: Recording fees are set by the county, rather than the title company. This covers the cost of transferring deeds and property.
Title Insurance Fee: Title insurance protects both the borrower and the lender in case there is a defect in title noticed down the road. It is a one-time fee that covers costly fees for detailed title searches and examinations of public records to protect against claims for past occurrences.
Lender Credit: Lender credit is the opposite of a discount point. A lender credit can offset a portion or all of your closing costs. In exchange for this credit, the lender typically charges a higher interest rate.
Homeowner’s Insurance: Homeowners insurance protects your home’s structure and personal property in the case of a destructive event, such as a fire.
Property Taxes: Paying property taxes is a responsibility for all homeowners. The tax is usually based on the value of the owned property. Talk to your lender about your property tax payment options!
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