Understanding Closing Costs

When buying or selling a home there are fees or “closing costs” that are associated with the mortgage transaction. There are many variations to these fees by location (primarily state and county), the lender, the type of loan, and your specific transaction.

Basics Standards of Closing Costs:

• Down Payment. This is what it sounds like – the money you will put toward the purchase of the home apart from any mortgage. The size of the down payment can influence the amount of risk the mortgage lender is willing to take. For instance, you might get better loan terms by committing to a larger down payment amount.
• Title search fees, which pay for a background check on the title to make sure there are not any unpaid mortgages or tax liens on the property.
• Title insurance, which help protects the lender and/or borrower depending on the coverage purchased in case the title is not “clean.” That is, if some lien or other encumbrance on the property is in fact discovered later.
• Attorney’s fees for closing the loan transaction. This is what it sounds like: The attorney who helps finalize the transaction will charge a fee that will vary.
• Appraisal Fees. An appraisal of the property to be purchased is requested to help determine if it is valued below, at or above the selling price.
• Lender fees include underwriting fees which cover the cost of evaluating your mortgage application.
• Recording fees to the county, so the transaction can be entered into records.
• Stamp tax based on state and county requirements. Again, this is one of the fees associated with ensuring the transaction is recorded with various governments.
• Credit report fee. Simply, what it costs for the lender to pull your credit report to help determine your credit scores.
• Origination fee: This is based on particular companies that you pick to process your mortgage. Not all companies add an origination fee.

You also should know about some costs that are involved in the loan transaction that are not considered closing costs, as they are paid prior to closing and are subjective. These fees again are generally based on state and county requirements:

• Pest inspection fees.
• Survey fee, this includes the verification of property lines, and may reveal other things about the property, like whether or not it is in a flood plain.
• Inspection fees of the property. Buyers often want to have a certified property inspector go over the home to be purchased to assess whether or not items are up to code, judge the safety and remaining life of systems, and more. Based on the inspection, some buyers may then ask for seller contributions toward repairs or a home warranty.
• Escrow deposits for home owner’s insurance and property taxes. These are funds set aside to pay crucial costs. Obviously, taxes must be paid and your lender will require that your property be insured.
• Home Owner’s association fees. Your new home – no matter the type/style – may be part of an association. If so, you should know those fees and particulars like when they are due and what they cover.

Now, the biggest question everyone asks is, How do I avoid closing costs?

The answers vary depending on whether you are looking at a purchase versus a refinance. On a purchase, you can negotiate with the seller to give you a credit toward closing costs. This is purely subjective in your negotiations. And it’s good to know that some types of loans have a maximum the seller can contribute toward closing costs; you can’t negotiate around requirements of the loan.

Some lenders – or their funders – offer a no-closing-cost (to you) or “lender-funded” loan, which is accomplished by increasing the interest rate on the loan to accommodate the fees associated with the loan.

Also, on a refinance, you can roll the fees into the new loan amount as long as you have enough equity in the property to cover those costs.

Both your mortgage lender and your real estate professional should be able and willing to help you understand closing costs and other facets of your transaction. In fact, a red flag would be if they are unable or unwilling to help you understand the lingo. Likewise, the closing attorney, as noted above, should go over much of this information at your closing and be willing to answer any questions. Even so, it’s a good idea to understand much of this before you get to the closing table because, at that point, you’re really just finalizing things.

So, again, look to your lending and real estate pros for guidance and for help with questions. Too, before you get to the closing table you’ll have documents that enumerate all of these costs. Use them to answer any questions you may still have. The primary document that shows you all of this is changing in 2015 due to changing regulations, but will still be available to you. In fact, one of the changes will mandate that you see a summary of all of these costs three days before your closing.