A Brief Explanation Of Closing Costs

Posted on: 12 June 2015

When sealing the deal on a new home, the down payment isn't the only cost you'll have to worry about. There are also closing costs--various miscellaneous fees incurred throughout the real estate transaction that come due at its close.

What to Expect

If and when you have your sights set on a particular home, your lender will give you a Good Faith Estimate (GFE) of the various closing costs you'll have to pay. GFEs are typically an advisory document that gives buyers a rough draft estimate of their closing costs, so it should be taken with a grain of salt.

This is where the settlement statement comes into play. Unlike the GFE, the settlement statement offers a itemized account of the miscellaneous fees you'll have to pay before you receive the keys to your new home. You should ask for your settlement statement at least a day before the close so you'll know exactly how much you'll pay in addition to your down payment.

The following is a brief list of fees you'll be responsible for at closing:

  • Origination fee – Charged by the bank for making the home loan available to you.
  • Initial interest – Covers the interest charged from the date of the close to the end of the month.
  • Appraisal fees – Covers the cost of the bank-hired appraiser.
  • Title services and title insurance – Sometimes covers both the title company's services and title insurance for your home.
  • Private mortgage insurance – This only applies if you put down less than 20 percent on your home.
  • Discount points – Many lenders will charge these for giving you a lower interest rate.
  • Surveyor's fee – Covers the cost of surveying the property and establishing property lines.

Who Pays for What?

Traditionally, it's the buyer who's responsible for paying closing costs. These fees often add 2 to 5 percent to the purchase price of a typical home. For a $200,000 home, this could amount to $10,000 or more in added costs at closing. On some loans, the seller may pay a small portion of the closing costs.

One way of avoiding closing costs involves the use of a no-closing cost mortgage. With such a mortgage, the closing costs are taken care of by the lender in exchange for a slight bump in the interest rate. It's a good option to exercise if you have enough money for a down payment but not enough to tackle closing costs.

To learn more about closing costs and buying a home, contact real estate agents in your area.