The point in time when you finalize the purchase of your home and receive title to your new home is called the “closing.”
Before you can assume title to your new home, you will be required to approve and pay for a variety of services provided by your lender, your title company and home insurance agency. These one-time fees are known as “closing costs.” They are in addition to any down payment you may be making to lower the monthly payment on your home.
Your mortgage lender is required to give you a Good Faith Estimate (GFE) of your total closing costs within three days following the submission of your mortgage loan application. Another form, called the HUD-1 (Settlement Statement) must be delivered to you at least one day before your closing date.
Sometimes the closing fees disclosed on the HUD-1 are higher than those provided in the Good Faith Estimate. You should carefully review and compare the HUD-1 statement with the original Good Faith Estimate you received to ensure you understand how much money you will be required to pay on the day of closing and to avoid unpleasant financial surprises.
If the HUD-1 statement of closing fees varies from the original GFE, don’t be afraid to ask your lender, title company and/or insurance company to explain the discrepancies so you understand what you are paying.
What Can I Expect to Pay in Closing Costs?
Total closing costs typically total somewhere between 2% and 6% of your home’s purchase price. That means that for a $100,000 home purchase, you should be prepared to pay between $2,000 – $6,000 in closing costs at the time you go to closing (in addition to the down payment on your home.)
What Is Included in Closing Costs?
Closing costs may include some or all of the following:
- Document processing fee. Expect to pay $600-$700 to cover the costs of processing your loan application, credit report and home appraisal.
- Loan origination fee (sometimes called “points”). This fee is typically between 1-2% of the home purchase price and covers the costs of loan underwriting, processing your loan, and mortgage broker commissions.
- Private Mortgage Insurance (PMI). This is usually (but not always) required if your down payment is less than 20% of the home purchase price. PMI fees are added to your mortgage payment each month. However, if PMI is included in your mortgage terms, then you will need to pay at least 2 months worth of PMI premiums at the time of closing.
- Inspection Fees. These can include home inspection fees and pest inspection fees. Home inspection fees typically range from $200 – $800 depending on the size of the home.
- Escrow Fee. This fee is paid to the title agent or real estate attorney to compensate them for the time spent processing purchase-related paperwork and funds.
- Survey Fee. Some states require that a property be surveyed before changing ownership to verify the property’s legal boundaries.
- Prepaid Interest. This is prepaid interest that accrues between the day you go to closing to the last day of the month.
- Loan Discount Points. This is an optional fee you can choose to pay if you want to lower the interest rate on your mortgage loan.
- Homeowner’s Insurance Premium. This is a mandatory fee to protect the property against loss due to fire, storms, vandalism, wind, etc.
- Title Search. This fee covers the attorney’s or title company’s costs of researching the property’s ownership history to verify that the person selling the property to you has the legal right to sell that property.
- Property Taxes. These vary depending on the home’s locality.
- Recording Fee. A fee paid to record the transfer of ownership of the property in the local courthouse.
- Other / Miscellaneous Costs. Courier fees, notary fees, etc.
Zero Closing Cost Mortgages
If you do not have the cash on hand to pay your closing costs, or simply want to preserve your available cash, you can opt for a “Zero Closing Cost” mortgage. In a zero-closing-cost mortgage, you agree to pay a slightly higher interest rate on your mortgage loan, and all closing costs are then paid by your lender.