When it comes to purchasing your dream home, you will need to properly understand every aspect of the process, especially the costs related to taking out a mortgage.
Closing costs are just one part of a mortgage’s three essentials, with the others being monthly payments and down payments. They will contain all the final expenses that you will need to cover before finalizing the purchase of your home.
It is usually the buyer that covers most of the closing costs, but this also depends on if the seller is willing to pay for some of them or split the costs.
What You Can Expect in Closing Costs
Closing costs are usually around six to eight percent of the home’s total price. For example, if you purchase a house worth $200,000, you can expect your closing costs to be around $6000 to $12,000. However, closing costs are not fixed and they usually vary according to your lender, the loan type you’re offered and the state you’re in.
Your lender will usually provide you with a loan estimate within three days after they acknowledge your loan, and this will include estimates of closing costs, as well as other loan details. While the prices may fluctuate by the time you reach closing day, you shouldn’t expect any big surprises.
Here are some of the closing costs that you can expect when securing a mortgage:
Loan-related Fees
- Application Fee: Some lenders charge an application fee to process your mortgage applications, but some lenders also combine an application fee with an appraisal fee, and a credit check as one amount.
- Loan Origination Fee: This usually costs around 0.5 percent of the principal amount and is charged for the work done by the lender during the underwriting process.
- Closing Attorney’s Fee: On closing day, it is mandatory by law that you have an attorney present during the process. You can choose your own attorney based on their rates and the number of hours that you will require them.
- Credit Check– Your lender will charge a certain fee for verifying your credit score during the verification process. A higher credit score would cost less interest and less closing cost, whereas a lower score would result in a higher interest rate and closing cost.
Property-related Fees
These fees are a part of the closing costs that you will have to pay and are related to the property:
- Home Appraisal Fee: A qualified professional will carry out a home appraisal to provide an unbiased opinion on the value of the property. They can charge between $200 – $500 for a home appraisal. If you fail to pay back the loan, this works as confirmation to the lender that they can foreclose your property and recover the loan amount.
- Home Inspection Fee- Home inspections are vital for government-supported mortgages and can cost between $300-$500. A home inspector will visit the property to check the quality and integrity of the structure. If there are issues, you can ask for repairs or negotiate for a lower price.
Mortgage Insurance Fees
Mortgage insurance fees related to the mortgage offered by the lender and you may need to pay for the following:
- Mortgage Insurance Application Fee: This fee is charged for the application for Private Mortgage Insurance (PMI), which you will be required to pay if your down payment is less than 20 percent of the total principal sum.
- Upfront Mortgage Insurance Fee: The mortgage insurance fee can range from 0.5 percent to 2.25 percent of the loan principal and can cover the entire duration that the insurance stays active or for the first year of the premium.
- Government-imposed Fee: These fees are only applicable for government-supported loans and depend on the government agency that you choose. If you take loans from the US Department of Agriculture and the US Department of Veteran Affairs, you will have to pay monthly guarantee fees.
If your loan is insured by the Federal Housing Administration, you will have to pay monthly FHA insurance premiums and an upfront amount of 1.75 percent of the principal sum.
Escrow Fees
Closing costs usually consist of escrow fees because you will need to open an escrow account before closing a mortgage. The lender will keep your escrow payments in this account and use it later to pay for property taxes and homeowner’s insurance when it’s required.
- Homeowners Insurance Escrow: You will need to pay around 14 months of homeowner’s premiums, which will be a part of the closing fees. Your lender will pay for a year’s worth of insurance from your escrow account and keep the rest away for two months of premium until the date is due.
- Property Taxes Escrow: The seller will pay for property tax from the beginning of the year till the closing date, and you will need to pay two month’s- worth of property tax to your escrow account.
Title Service Fees
These are fees associated with obtaining a title insurance policy that provides protection in the event that someone sues and claims that they own the home. Title service fees are as follows:
- Lender’s Title Insurance Fee: This protects the lender from any losses if claims are made after the property has been sold.
- Owner’s Title Insurance Fee: Owner’s title insurance protects the homeowner from any claims against the property.
- Search Abstract Fee: This fee is usually paid to a third-party to find out information about the ownership of the property. It confirms that the seller is the owner of the house and has the right to sell the property.
Research to Make the Right Choice
When it comes to your dream home, it’s okay to be confused about certain aspects during the buying process.
While you should have an understanding about closing costs and how they affect you, make sure to lean on your real estate agent to get you through the process and to avoid making any mistakes when purchasing the home of your dreams.
Have Questions? Ask Arial!
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