Mortgage closing costs are the payments you make when you finalize your purchase agreement. Costs vary by state and even by community. Some costs are determined by law, others by the lender, and some are simply customary in a particular region.
But there are some typical closing costs that you can expect and be prepared for in advance. Lenders are required by law to provide a good faith estimate of these costs. They should also notify you of any payment requirements, for example, if certain payments must be made by certified check. If you are working with a real estate attorney, he or she should walk you through the process in advance.
Typically, closing costs may include the following:
- Points: If you have chosen to pay points on your loan (or are required to by the terms of your loan), you’ll pay the points at the closing.
- Private mortgage insurance: Unless you are paying at least 20 percent as a down payment, you may be required to have private mortgage insurance, which protects the lender if you default on your loan. Private mortgage insurance usually costs one half of 1 percent of the amount of the loan. How much you pay upfront and how much you pay each month will vary.
- Loan origination fee: Your lender charges these fees for processing of the mortgage agreement and other paperwork.
- Escrow deposits for taxes: These will vary widely from state to state.
- Title insurance: This amount is determined based on the amount of the loan. Title insurance protects the buyer and the lender in the event that someone else has a deed or a claim to ownership of the property.
- Appraisal fees: This pays for the independent appraiser who estimates the value of the property. Your lender will use this valuation to determine whether the property is valuable enough to serve as collateral for the mortgage loan.
- Title company closing or escrow fees: This charge is paid to the title company for handling the closing. The amount can vary widely.
- Inspections: While not included in closing costs, a general home inspection is standard, and often a pest inspection will also be conducted and paid for by the buyer.
- Property survey: The lender may require a survey or plot plan of the property before closing. This is conducted to ensure that the boundaries in the purchasing agreement are correct.
- Homeowner’s insurance: This amount will vary considerably depending on the value of the home and will be paid for by the buyer.
Other fees may include a credit report fee, recording fees, and transfer taxes. You may also pay for flood insurance if your home is near the water.
Remember that closing fees are not all written in stone; many of the amounts are negotiable. Some are commonly paid by the buyer, others are split between the seller and the buyer, and some may even be paid by the lender. Ask your lender and your attorney about which fees can be negotiated and which are governed by state law.
In the end, closing costs should amount to somewhere between 2 percent to 7 percent of the price of the home.