What are Closing Costs?

Mortgage Closing Costs


Summary: Closing costs are fees and expenses buyers pay in addition to the down payment to secure a loan. Generally, closing costs can range between 3% to 5% of the loan amount. Some costs are fixed and standard while others may be optional.

Before you buy a house, you must close on the home. So, what are closing costs? Closing costs are fees and expenses you pay in addition to your down payment to secure your housing loan. Some costs are fixed and standard on a mortgage transaction while others may be voluntary. The mortgage lender you are working with may provide you with title companies and appraisal management companies they work with and trust. Generally, closing costs can range between 3% to 5% of your loan amount.

Here is a breakdown of what you may see in the closing documents regarding closing costs. Again, keep in mind different states have different fees and some fees may be covered by lenders or sellers.

CLOSING COSTS MEANING/USAGE
Appraisal Used to confirm the value of your home.
Closing Costs Goes to the individuals handling your closing such as the title company, escrow company, or attorney.
Credit Report Fee The charge a lender gives for pulling credit reports.
Escrow Deposit Some lenders may require 12 months of property taxes (city and county) and home insurance be placed in an escrow account at closing.
Homeowners Insurance This insurance protects you if your home gets damaged. Many lenders require a year’s worth of homeowner’s insurance at closing.
FHA Mortgage Insurance Premium If you have a FHA loan you will be required to pay the mortgage premium of 1.75% of the loan at closing.
Flood Determination and Monitoring Fee The fee is only needed for homes near or within a flood zone. The fee also covers ongoing observations.
Origination Fee This fee covers the administrative cost of processing your mortgage.
Pest Inspection Covers the fee of a professional pest inspection.
Points These are discount points buyers pay to lenders to reduce the interest rates. One point equals 1% of your loan amount. These are optional.
Prepaid Daily Interest Charges Covers any interest accrued on your mortgages from the day of closing until your first mortgage payment.
Private Mortgage Insurance (PMI) This is for conventional loans, and it is mortgage insurance borrowers pay if they put less than 20% down.
Processing Fee The cost of processing your loan.
Property Tax During closing, you may be required to pay local property taxes within 60 days of owning your home.
Recording Fee Fee given to your local recording office for recording public land records.
Survey Fee Fee charged to a surveying company that checks property lines to confirm the perimeter of the home.
Title Search Fee Used to ensure the seller does not owe anything before the buyer purchases the house.
Transfer Tax A tax placed by the local government to transfer the title from the seller to the buyer. Paid by the seller in Michigan and Florida. Paid by the buyer in Tennessee.
Underwriting Fee Fee for verifying your financial information, income, employment, and credit score.
VA Funding Fee This is for VA loans and helps to offset the programs costs.


In most cases you will not see all of these fees. Different states have different requirements when it comes to closing costs and closing fees.

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