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When you buy a home, you not only have to provide the down payment but, you must also take into consideration the amount you pay the lender for servicing the loan. Many buyers do not take into account all the expenses involved in buying a new home. One of these expenses is closing costs.  

 

What are Closing Costs? 

Closing costs are all those expenses that go beyond the cost of the property you are about to purchase. That is to say, they are the expenses paid to the lender for the services and procedures related to the loan you’ve been granted. These costs cover everything from the appraisal of your home, deeds, attorney’s fees, taxes, etc.  

 

Understanding Closing Costs 

Closing costs are incurred when the deeds to the property are transferred from the seller to the buyer. The amount to be paid depends on several factors. One of those factors is the location where the house is sold. The buyer usually pays between 2% and 5% of the total closing costs.  

Lenders are required by law to provide a loan estimate along with the closing costs of the home. This estimate is known as a “good faith estimate” and is done within 3 days of the application for the home loan. By law, the lender is also required to provide a disclosure statement describing all closing fees 3 days prior to closing. It is important to note these fees may differ from the loan estimate.  

 

What do Closing Costs Include? 

Loan Origination Fees 

This refers to the costs involved in the approval process. The appraisal is used by the lender to verify you have the financial ability to repay the loan you are requesting. This evaluation consists of the analysis of several factors including your credit history and credit points. These costs vary according to the rates offered by each lender.  

Property Title Insurance 

The policies for the buyer and the lender are established depending on the cost of the home. This expense is also included in the closing costs.  

Mortgage Points 

Mortgage points, also called discount points, are paid directly to the lender at closing. As a benefit of this payment, the borrower receives a lower interest rate on the mortgage.  

Property Taxes 

Taxes vary according to the location of the property. At closing, 6 months’ worth of these taxes are prepaid. This amount is variable since after closing, the property may be reassessed and therefore, the price could increase along with the real estate tax.  

Property Appraisal Fees 

To confirm the market value of the property to be purchased, an inspection and appraisal of the property are required. Charges for these services are also included in the closing costs.  

Attorney Fees 

The fees of the attorneys who help with the paperwork and signing process are included in the closing costs.  

 

Estimating Your Closing Costs

Knowing your costs will help you be well prepared during the process of buying your new home. It is important that you also consider pre-calculating your costs. There are tools, such as the closing cost calculator, which can help you budget for anticipated expenses so you don’t have to pay unexpected fees.  

You may be able to negotiate with the lender and save on some costs. You can also negotiate with the seller to pay a percentage of the closing costs since both parties benefit from these services.