Closing Costs and What are They

When you find the house of your dreams and get approved by the lender, all you have to do is just pay the closing costs, and you are the owner. Few days prior to the settlement day, you will have to meet with your real estate agent, loan officer, and the title company representative who will provide you with a copy of your closing documents. Look over the papers carefully as they contain many important details, which we will further discuss below.

Closing costs can be defined as lender and third-party fees that are paid at the closing of a real estate transaction. These costs can be paid in advance, but usually, they are paid on the settlement day. The size of the closing costs usually varies from 2% to 5% of the final sale price (eg. for a $200,000-worth property, closing costs would be around $4,000-$10,000).

Knowledge and understanding of the nature of these costs will provide you with significant insight into the process and will help you avoid stressful situations at the end, thus we highly recommend learning about them by reading the short summary below.

First of all, closing costs are divided into two categories, recurring and nonrecurring fees, which are integral parts of the transaction.

Recurring fees

Recurring fees represent ongoing costs which you are obliged to meet as a homeowner, with a portion due upon closing; This sum will be stored in your escrow account and may be considered as a form of mandatory savings designed for covering those upcoming home expenses you’ll be facing.

Types of recurring fees

Most common forms of fees included are:

1. ) Property taxes (one to eight months’ worth, depending on when your home purchase coincided with the local tax billing cycle);
2. ) Homeowners insurance (the annual premium is typically due at closing, plus another two or three months’ worth of payments);
3. ) Prepaid loan interest (for the number of days you’ll have the loan until its first payment is due);
4. ) Title insurance is a cost placed into escrow, which is considered a must because it protects you in case the seller doesn’t have full rights and warranties to the title of the property.

Non-recurring fees

Non-recurring fees are one-time costs related to borrowing money and the services that were required to purchase the property.Non-recurring costs are designed for paying your lender and other professionals involved in the process of buying.

Types of non-recurring fees

1. ) Home inspection fees;
2. ) Any discount points paid in advance to decrease your interest rate;
3. ) An origination fee charged by the lender to process your loan;
4. ) A document-prep fee, which covers the cost of preparing your loan file for processing;
5. ) An appraisal fee, which covers the cost of a professional estimating the market value of the home;
6. ) A survey fee for verifying the home’s property lines;
7. ) An underwriting fee for the cost of evaluating and verifying your loan application;
8. ) A credit report fee for pulling your credit scores;
9. ) Title search and recording fees;
10. ) A wire-transfer fee for wiring funds from the lender to your escrow account.

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