Closing Costs Explained

Closing costs rarely enter your mind as you house hunt, but it is something that comes up before your transaction is over.  Understanding closing costs now can help reduce your anxiety prior to the actual sale.

Closing Costs Explained

Closing costs rarely enter your mind as you house hunt, but it's something that comes up before your transaction is over.  Understanding closing costs now can help reduce your anxiety prior to the actual sale. So the first step is understand how the process works.

First, when you buy a home, or other real estate property, you go through a period known as escrow where various issues related to the property transfer are finalized. The last day of escrow is known as the closing day and most time it's the buyer who is the one paying closing costs. These ‘closing costs' take several forms, like escrow agent fees. An escrow agent is basically a third party that works with the buyers and sellers to finalize the transaction. But other closing costs might include:

Home Loan "Points"

Points are essentially a fee you pay or have built into the loan for the privilege of being allowed to borrow money. Sometimes, too, the more points you pay, the better your loan rate will be. A point usually equates to 1% of the loan, so on a loan of $300,000 one point would equal $3,000. If you have excellent credit, you can shop for a loan that doesn't require points. However, if you have shaky credit, but cash on hand, then ‘buying a better interest rate' might suit you.

Insurance: Home and Title

Home and title insurance are a must. In fact, a bank won't loan money without them. But even if you are buying a home outright, with no lender involved, it's important that you insure your purchase with home and title insurance.  Home insurance must equal the mortgage pay off amount and, in some cases, flood insurance might also be required. As for title insurance it provides insurance against problems with the title being transferred to you since you need a clear title.

PMI

If you're putting down less than 20% then you're required to pay Private Mortgage Insurance, known as "PMI". PMI usually costs a few hundred dollars a year because of inspection, appraisals and other miscellaneous fees. This is why so many people usually wait until they have 20% to put down before home shopping.

You might find that your dream home comes with other fees too for home inspectors, appraisers, surveyors, assessments and so forth.  This is where having a Realtor who's attentive means so much. That way you know exactly what you must pay on closing day so you can budget accordingly.