Closing Costs Explained

If you've not bought a home before, and not had to pay closing costs, they can seem a bit daunting. There are even some people who have already been through a property transaction, who are not entirely sure what they've paid for!

Closing costs are paid by the buyer towards the end of the home buying transaction, before the mortgage provider will finalize the mortgage. They are payable in addition to your down payment, and comprise about 3 to 6 percent of the total amount borrowed.   

The mortgage lender will generally charge an application fee to cover the costs of completing your mortgage application, and there may be an additional fee to cover your credit report.  Also, lenders charge a loan origination fee -  known as points.  This covers the administrative costs of processing your mortgage - one point being equal to 1% of the total amount loaned.  Lenders often allow the option to purchase without points, but this generally results in a higher interest rate being charged.  Some lenders who will permit the payment of additional points to lower the interest rate on your loan.

Homeowners and Title insurances will be required by your lender.  Homeowners insurance is a standard requirement of mortgage lenders, and they will require proof that it is in place.  You may be required you to pay the first year's premium before closing. 

Title insurance protects the mortgage company and yourself against the risk that the seller does not have the legal right to sell the property. For example, if there were unknown co-owners of the property, or there was an unpaid lien against the property,  that would prevent the seller from selling it legally. It also covers against any claims to ownership from any previous owner of the property.

Private mortgage insurance may also be required, depending on the amount of your down payment, and part of the fee will be included in your closing costs. Generally if your down payment is less than 20% you will be required to take out private mortgage insurance, as a protection for the lender, in the event of you defaulting on the loan.

If you are moving to an area prone to flooding, you may be required to take out flood insurance.

An appraisal is also required by mortgage lenders to ensure the home is worth the purchase amount loaned to you.  A home inspection is not usually required, but it's recommended to have one.  The inspection cost could also be considered part of closing costs.

Taxes associated with the transfer are usually the buyer's responsibility, unless otherwise agreed.  You may also have to pay for a property survey.  Any interest accrued between the time your mortgage was initiated and the due date of your first payment, could be payable.  And attorney and notary fees may also be a part of your closing costs.

Closing costs are comprised of all of the expenses that must be paid before the purchase of your new home is finalized.  Points are a fee charged by your lender and may be flexible, as they directly affect your interest rate. 

Understanding the fees you have to pay to buy a house, can help you budget and be prepared for them when the time comes.