Understanding Closing Costs
Adam Wilson

Many buyers don’t completely understand that they will have to show up at closing with more than a down payment. A myriad of closing costs could drain much of your excess cash. Here are some of the typical closing costs associated with the purchase of a home.

Loan Origination Fees: Lenders charge anywhere from .5% to 3% of the amount borrowed. If you are low on cash it is possible to shop for a loan with little or no fees. However, these loans will have higher interest rates resulting in a substantial increase in the amount of interest you will pay over the lifetime of the loan.

Escrow Fees: These fees vary based on the purchase price of the home and the title company in charge of the escrow process. They cover the cost of handling purchase related documents, and funds.

Homeowners Insurance: The lender will want to see that the collateral used for the loan, your new home, is properly insured. It is not enough to simply promise to pay for the insurance. Instead, part of your closing costs will include the first year’s premium for the insurance policy you select.

Title Insurance: Title is an abstract tem denoting ownership. The point of title insurance is to protect you and the lender against the remote possibility that the person selling you the home doesn’t legally own it. Title insurance can vary in cost based on the homes purchase price.

Property Taxes: If the seller has already paid property taxes through a specific date, and you purchase the home before that date, then you will be responsible to reimburse the seller for the taxes that they paid in advance.

Prepaid Loan Interest: In order to understand prepaid loan interest remember that mortgage interest is paid in arrears; Meaning that your monthly payment covers interest from the previous month. For example, you close on a home in December. Your first mortgage payment will be due in February. The payment in February covers the interest for the previous month of January. So your closing date in December will determine the amount of prepaid loan interest you pay at closing. If you close early in December the prepaid loan interest will be greater than if you close at the end of the month. Time closing to minimize the amount of advance loan interest that you will have to pay.

Recording: To record a deed and mortgage will cost around $50.

This is a summary of the closing costs that you can expect at closing. These can add up quickly and drain your extra cash in a hurry. Mitigating these costs is part of negotiating a good deal. In today’s market buyers can request that sellers cover some or part of the closing costs. Also, your real estate agent can contribute part of their commission towards closing costs. Whatever the case, make sure you are aware of closing costs before your transaction draws to a close.