What are closing costs?
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When you buy or refinance a home, you will need to budget for closing costs. Mortgage closing costs are fees and expenses you pay when you secure a loan for your home, beyond the down payment. These costs are generally 3 to 5 percent of the loan amount and may include title insurance, attorney fees, appraisals, taxes and more. Here is a quick look at some of the main closing costs.
What do you pay at closing?
Loan origination fees
These include fees for processing and underwriting the loan and typically run about 0.5 to 1 percent of the loan. Underwriting is part of the loan approval process, when the lender checks to see if you’re able to repay your loan based on many factors including credit history.
Appraisal and survey fees
The appraisal and survey are used to help confirm the fair market value of your home. Fees for these services may vary but are usually several hundred dollars.
Policies that ensure the property can be transferred legally cover both the buyer and lender. They are calculated based on the purchase price.
The first year is generally paid at closing.
Private mortgage insurance (PMI)
If your down payment is less than 20 percent, you may need to pay private mortgage insurance, which protects the lender against losses if you cannot repay your loan.
Also known as discount points, mortgage points are paid directly to the lender at closing in exchange for a lower interest rate on your mortgage.
Usually, six months of advance tax is paid at closing. Taxes vary by location. Keep in mind: After the loan closes, the property may be reassessed, and the value could increase along with the real estate tax. Escrow amounts may also need to be readjusted to ensure there is enough to pay for any tax increases.
Closing or escrow fee
This fee goes to the escrow agent who helps you close. While it can vary based on the escrow company you use and the home’s location, the fee is typically between 1 percent and 2 percent of the sale price.
Some states require you to have an attorney. Their fees may be bundled into your closing costs or paid separately as a flat fee.
Several smaller fees may also be included at closing, from the cost of a $30 to $50 credit report to the cost of registering your purchase with the local government.
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3 ways to lower closing costs
If you’re concerned about closing costs adding up, there are steps you can take to help ease some of the burden. In addition to shopping around for insurance or negotiating attorney fees, keep these strategies in mind:
By getting mortgage approvals and loan estimates from more than one lender, you can compare different lender’s fees. You can use this information to ask questions of potential lenders—and try to negotiate things like closing or escrow agent fees and loan origination fees.
Ask the seller to contribute.
Depending on where you want to live and other factors surrounding your purchase, you may be able to get the sellers to pay for some of your closing costs.
Explore rebates or incentives.
Some banks may offer rebates for eligible borrowers or first-time homebuyers. It’s worth asking about these possibilities when you’re shopping around for a mortgage lender.
How to estimate closing costs
Once you submit a mortgage application, your lender is required by law to give you a Loan Estimate (LE) within a few days. If you have questions or something doesn’t add up in your LE, ask your lender or attorney right away. You want to avoid surprises.
Prior to closing your loan, you’ll receive your final Closing Disclosure listing your closing costs. Be sure to compare your Closing Disclosure to the LE you received when you applied for your loan. Generally, you’ll be asked to pay via cashier’s check.
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