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What Are Closing Costs – and Why Are They Needed?

by Right By You Mortgage News

You’ve saved for months, maybe years, to come up with a down payment on a house. You’ve spent weeks or months looking for the right one to buy. And you’ve just been approved for a mortgage. You’re all set, right?

Well, there’s one other thing that most buyers don’t think about, and it can come as a bit of a shock if you aren’t expecting it—closing costs. When you get a mortgage, there are expenses that you can count on to close on your new home. They typically run between 2 and 6 percent of your loan amount. That’s why it’s so important to talk to a Mortgage Loan Officer up front. They can help you to know an estimate of your closing costs, so you have a plan to pay for them.

 

What exactly are closing costs? 

Closing costs are all the fees that you pay for various services and expenses that go along with getting your mortgage. Whether you’re buying a home or refinancing your current mortgage, there are always closing costs to pay.

There are many different types of closing costs, and what you’ll pay will depend on the loan you get and your particular situation. Here’s what closing costs usually entail:

Home appraisal – This compares your home to others in the market so that you and your lender have a firm understanding of the value of your home (it’s not always just what you’re paying for the home). Most appraisals cost around $500-650 for a single-family home but can vary depending on a property’s size and acreage.

Loan application fee or Commitment Fee – This pays for the cost of processing and sometimes underwriting your application. Application fees also vary, but you can estimate $800-1200.

Loan discount fee or “points” – This is a fee that you pay when you’d like to pay for a lower than market rate. This can also be called “buying down” your rate. This fee will vary based on the day and isn’t required to a get a loan. You can ask your lender for a “par” rate instead with no discount points.

Prepaid interest – This is the interest that accrues on your loan between the time you close your loan and the time the first monthly payment is due.

Title fees – This pays for a title search to make sure there are no liens or claims against the property. Title fees are generally about $200-600. Most lenders also require title insurance, which protects them if there’s a dispute over the ownership of the property after the sale. Title Insurance can cost $2 per $1000 borrowed.

 

Are there other types of closing costs?

There can be. Your lender will probably charge you for your credit report and for a Flood Certification. Credit Reports are normally only $30-50 per borrower. Flood Certifications tell you and your lender if your property is located in a flood zone. This cost is normally $15-25.

If you chose to get your loan through a mortgage broker, you’ll have to pay the broker’s commission, which can vary between 0.5 percent to 2.5 percent of the amount of the mortgage. 

You will need to use an attorney to help you close and he or she will charge you a fee for their services. Expect to pay about $1,000 or so. You may also be responsible for any property taxes due within 60 days of the closing, which will be added onto your closing costs.

And you’ll need to pay the first year’s Homeowner’s Insurance premium at the closing if you’re buying a home.

 

How do I know how much my closing costs will be?

If you read your loan documents carefully, your closing costs shouldn’t come as a surprise.

After you apply for a mortgage, your lender must provide you with a Loan Estimate, which includes estimates of your closing costs. Three days before your loan closes, you’ll receive a Closing Disclosure, which will show any adjustments that were made to your closing costs. Be sure to read them carefully and ask your lender if there’s anything that you don’t understand or doesn’t make sense.

 

What if I can’t afford my closing costs?

If it’s allowed, your lender may be able to wrap your closing costs into your loan. If you choose this option, however, you’ll be paying interest on closing costs over the loan term, so the better option is usually to pay them all at once.

You may also be able to ask the home seller if they will pay some or all of your closing costs. Otherwise, there are some first-time homebuyer programs available that will pay some or all of your closing costs. Your lender should be able to tell you about them and find out whether you’ll qualify.

If you have more questions about closing costs, feel free to contact a Right By You loan expert at 1-877-552-2242, or drop us a note to inquiries@rightbyyoumortgage.com. We’re always delighted to help!