When you close on a property there are administrative costs that need to be covered before you can call yourself the owner. These are closing costs, and where there is a large financial transaction paperwork will surely follow. First time home buyers may have a number of questions concerning the closing process. SmartAsset can help guide you through labyrinth of fees and checks.
What are closing costs?
Closing costs are the expenses that must be paid at your closing. They will be taken care of by either the buyer or the seller of the property.
Who is involved?
There are a lot of people involved in a closing of a property and most of them aren’t just there for moral support.
- Notary public- When you close on a property a notary is required to recognize that the correct people signed the correct papers. He gets paid for that.
- Settlement agent- The party who has done the calculations, and prepared the paperwork will definitely be getting paid on closing day. The agent oversees the closing itself. Some of these agents charge for the preparation of legal documents such as mortgages, the deed of trust, etc. The fee is often split between the buyer and the seller, as the agent is working for both.
- Attorneys Both the buyer and the seller will likely have their legal representation present at the closing. They make sure their clients know what they’re signing themselves into. Attorneys get paid for that. Who pays for their services, however, is a matter of contract negotiation prior to the closing.
- Home Appraiser Remember before you got to the closing you had to go through an inspection of the property? Yeah. That wasn’t free. Inspection fees will vary, as most of these costs will. The inspection is a necessary step for you to receive ownership of the property. Where you live and what is being inspected will determine how much they’re going to get paid for doing so.
Of course, these costs and who will pay them varies case-to-case.
What the lender will require
In some cases, the lender may require the buyer to pay certain fees at the closing or even in advance of the closing date. These fees include:
- Interest fees from the day of the closing to the end of the month of the closing will usually be incurred. After the closing process is finished, interest is accumulated and paid as part of the monthly loan installments that you’ve already agreed upon.
- Insurance Premiums will be charged as well.
- Mortgage insurance, for example, is payable to a private mortgage company. This is essentially a lump sum that covers the life of the loan.
- Hazard insurance is often required as well. This is commonly referred to as homeowner’s insurance. It protects against fires, storms, natural hazards- of course the coverage varies in different cases so be sure to read your policy.
Many times, the aforementioned fees that the lender requires will be paid in advance of the closing. This is a way to make sure the buyer does not back out.
Most people need to obtain a mortgage loan to pay for their home. Fees associated with the loan are usually paid directly to the lender. Sometimes mortgage brokers are involved and their fees will be shown in a designated section on the HUD-1.
First off, there is a fee just for obtaining the loan itself. It’s usually a percentage of the loan amount, but it can also be a flat dollar amount. This is also called an application fee. This will most definitely differ from lender to lender.
Points- or a loan discount can be arranged. Each point is 1% of the mortgage amount. Paying points upfront can reduce the interest rate you pay on your loan. This option should be taken into consideration with the following in mind- do you have the necessary cash to pay for your loan? And how long do you intend on staying in the home before selling or refinancing? The longer you intend on staying, the better off you may be paying something upfront. Again, this will vary from case to case.
The lender will also want to have the property appraised. What’s the home really worth and how much are they willing to pay for it? There will be a fee associated with the appraisal.
There may also be costs specific to the lender regarding their own inspection.
The lender may also charge for a credit report before they make a deal with you in the first place. And of course, this will also vary case by case.
You’ll have a fund set up that is essentially like a doctor on call. You hope that your escrow fund won’t be paged in the middle of the night- but it could be. Escrow payments are made just in case something comes up and needs to be paid for. Be sure to ask your lender how these types of costs will be paid on an on-going basis after the seller is completely out of the picture.
The costs associated with closing on a property are not written in stone. There are a number of variables that go into purchasing property and each variable affects the cost altogether. It is important that you talk to your lender and your agent for specific information regarding your closing.
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