What are closing costs and why do I have to pay them?

If you’ve begun the process of buying a home, you’ve probably heard the term closing costs. You may have wondered what they are and why you have to pay them. The term “closing” refers to the transfer of the title of the property from the seller to the buyer. Closing costs refer to the expenses you’ll incur getting to your actual closing. On average, expect to spend between 3 to 5 % of your total of loan amount.

Both buyers and sellers pay some form of closing costs. Buyer’s costs typically include mortgage insurance, homeowner’s insurance, appraisal fees and property taxes. They also include other fees such as a lender application fee and loan origination fee.

Not all lenders require an application fee. When they do, it’s to cover administrative tasks associated with processing your loan application.  It’s usually a fixed amount. The loan origination fee is assessed to cover setting up your loan. It’ll cost about 1% of the entire loan amount.

The lender may also require a deposit into an escrow account. This covers two months of property taxes and mortgage insurance payments. You will also be required to carry homeowners insurance.

There may be points. Points are charged at the closing table. They’re a lump sum, paid out to lower the interest rate on the life of the loan. Each percentage point you drop will cost about one percent of the total value of the loan.

The lender will require an appraisal. This is to ensure the house you want to buy is at fair market value. The buyer usually pays the appraisal fee to an appraisal company.

Not just the lenders fees –

The buyer pays for a fee that is actually called a closing fee. This fee is paid out to the title company for managing the closing as an independent party in the purchase of your house. You will probably also pay the title a title search fee, for doing property record search to make sure no one else has a claim on the house you want to buy.

As the buyer, you will more than likely want to get a home inspection to make sure the house you’re buying is in good shape and not in need of any major repairs. It’s always a good idea to get one, but plan on paying for it yourself.

This list is not exhaustive. There are several that can crop up between the time you make your offer and the time you’re at the closing table. Your Realtor can negotiate with the seller’s agent to cover some of your closing expenses. Be sure to read the closing disclosure statement before closing on the house. If you have questions, ask your lender to explain the charges.

As always, if you have questions about the home buying process or any other real estate related question for that matter, give the Watts Realty Team a call at 269-488-1530.  We’ll be happy to help!