What are Closing Costs
Closing costs are the expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction. Costs incurred may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Prepaid costs are those that recur over time, such as property taxes and homeowners' insurance. The lender is required by law to state these costs in a "good faith estimate" within three days of a home loan application.
BREAKING DOWN Closing Costs
Closing costs occur when the title of property is transferred from the seller to the buyer. The total dollar amount of closing costs depends on where the property is being sold and the value of the property being transferred. Homebuyers typically pay between 2% to 5% of the purchase price, but closing costs may be paid by either the seller or the buyer.
Examples of Closing Costs
Origination fees are fees charged by the bank for the creation of a loan. The fee typically amounts to 1% of the mortgage. The buyer can purchase discount points up front to reduce the interest rate charged by the bank. Although the bank requires a credit report and loan application, these fees are negotiable and can be covered by the bank. Private mortgage insurance is an additional fee applied to any purchase with a down payment less than 20%.
Title insurance protects the lender from claims against the house and protects the buyer from past contractors making claims against the property. Lenders often require an appraisal, which can cost up to $400 in most areas. Local governments charge recording fees and taxes to record the sale of property. These transfer taxes vary from state to state.
Loan Estimate and Disclosure Statement
Laws require lenders to provide a loan estimate that reveals the closing costs on the property. Under the Real Estate Settlement Procedures Act (RESPA), lenders are required by law to provide this estimate, also known as a good faith estimate, within three days of the lender taking a borrower's loan application. At least three days prior to the closing, the lender should also provide a closing disclosure statement outlining all closing fees. The listed fees may have changed from the loan estimate.
No-closing-cost mortgages eliminate all upfront fees for the buyer upon closing. These types of mortgages are beneficial in the short term but likely result in higher interest rates. The closing costs can also be buried into the total mortgage, which means the buyer pays interest on the closing costs over time. Therefore, while no-closing-cost mortgages are helpful in reducing initial capital outlay, there are long-term financial ramifications to consider.