What Items Are Included in Closing Costs?
Closing costs are an essential part of the home buying process, often overlooked but crucial for understanding the total cost of purchasing a property. These costs encompass a variety of expenses that buyers must pay at the time of closing, in addition to the purchase price. In this article, we will explore the various items that are typically included in closing costs, helping you to better understand what to expect when you buy a home.
1. Lender Fees
One of the most significant components of closing costs is lender fees. These fees include points, origination fees, and loan processing fees. Points are a percentage of the loan amount that borrowers can pay to secure a lower interest rate. Origination fees are charged by the lender for processing the loan, while loan processing fees cover the cost of underwriting and other related services.
2. Title Insurance
Title insurance protects the buyer and lender against any legal claims or disputes regarding the property’s title. It ensures that the seller has clear and marketable title to the property and that there are no liens or other encumbrances that could affect the buyer’s ownership. Title insurance is typically paid at closing and is usually split between the buyer and seller, depending on local custom.
3. Appraisal Fee
An appraisal is a professional assessment of the property’s value, which is required by the lender to ensure that the loan amount is not greater than the property’s worth. The appraisal fee is usually paid by the buyer and can vary depending on the property’s location and size.
4. Credit Report Fee
Lenders use credit reports to evaluate a borrower’s creditworthiness. The credit report fee is charged by the lender for obtaining a copy of the borrower’s credit history. This fee is typically non-refundable and is paid at closing.
5. Homeowner’s Insurance
Homeowner’s insurance is required by lenders to protect the property against damage from fire, theft, and other unforeseen events. The first year’s premium is usually paid at closing, and subsequent premiums are paid annually.
6. Property Taxes
Property taxes are paid to local governments and are based on the assessed value of the property. At closing, buyers may be required to pay a portion of the property taxes that cover the time between the closing date and the end of the fiscal year.
7. Private Mortgage Insurance (PMI)
If the buyer’s down payment is less than 20% of the home’s purchase price, private mortgage insurance (PMI) may be required. PMI protects the lender in case the borrower defaults on the loan. The cost of PMI is usually paid monthly, but a portion may be due at closing.
8. Escrow Account Funding
An escrow account is used to pay for property taxes and homeowner’s insurance. At closing, buyers may be required to fund the escrow account with an initial deposit to cover the first year’s expenses.
9. Survey Fee
A survey is a detailed map of the property that shows its boundaries and any improvements on the land. The survey fee is charged by a professional surveyor and is usually paid by the buyer at closing.
10. Other Miscellaneous Fees
There may be other miscellaneous fees associated with closing costs, such as document preparation fees, attorney fees, and notary fees. These fees can vary depending on the lender, location, and complexity of the transaction.
Understanding the items included in closing costs can help buyers plan their finances more effectively and avoid unexpected expenses. By knowing what to expect, you can ensure a smoother and more stress-free home buying experience.
