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You’ve found the perfect home. The seller has accepted your offer. Your loan has been approved and you are eager to move in. Before you get the key to your new home, there’s one more major step to take. It’s called the closing or settlement.
Closing is the process of passing ownership of property from seller to buyer. It will be less bewildering if you understand the process and the fees right from the beginning. As a buyer, you will sign what seems like an endless pile of documents and you will probably need to present a sizeable check for the down payment and various closing costs. The fees associated with the closing too often remain a mystery to buyers who hand over thousands of dollars without really knowing what they are paying for.
As a responsible buyer, take the time to become familiar with these closing costs that are both mortgage related and government imposed. Although many of the fees vary by locality, some of the common ones are listed below.
Appraisal: This fee pays for the appraisal of the property and is often collected by the lender at the beginning of the loan application process.
Credit Report: This fee covers the cost of the credit report requested by the lender and is usually collected when you apply for the loan.
Loan Origination: This fee covers the lender’s loan processing costs and is typically about one percent of the total loan amount.
Loan Discount: This is a one-time charge that must be paid if you have chosen to buy down or lower your interest rate. In some cases this fee may be paid by the seller. You are not likely to consider this option while interest rates remain low.
Title Insurance: These fees generally include the cost for the title search, title examination, title insurance and document preparation.
PMI Premium: If you buy a home with a low down payment, a lender usually requires that you pay a fee for mortgage insurance. You may pay a flat fee at closing and an additional amount along with your monthly house payment. This protects the lender against loss due to foreclosure. Once a new owner has 20 percent equity in the home, he or she can normally apply to eliminate this PMI (private mortgage insurance).
Prepaid Interest: This covers the interest payment from the date you purchase the home to the date of your first regular mortgage payment. Generally, if you close a home purchase early in the month, the prepaid interest fee will be substantially higher than if you close your purchase towards the end of the month.
Escrow Accounts: Escrow (or impound) accounts are held by a lender for payment of property taxes and home insurance. At closing the lender will generally collect at least one year plus two months worth of homeowner’s insurance premium. In addition, taxes equal to approximately two months plus the number of months that have elapsed in the year are paid at closing (If 6 months have passed, 8 months of taxes will be collected at closing). This is a good way to insure that funds are set aside to cover tax and insurance payments, but many buyers choose to handle these payments from their own savings account if that option is available.
Recording Fee: This fee covers the cost of recording the purchase documents and transferring ownership of the property.
In addition to the fees mentioned above, you will probably choose to have one or more property inspections and will need to pay for that early in the process. Talking to your real estate agent about the fees you will be expected to pay during the closing of your new home is a very important part of the home buying or selling process. You might be able to negotiate some of these costs with the seller during the offer/counteroffer stage, and in some instances, the seller might even agree to pay most or all of the closing or settlement costs.
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