First-time homebuyers realize that “closing” is the final step in their home purchase. And while they know that “closing costs” are part of the process, the vagueness of the term often leaves them struggling to decipher documents just days before closing. 

Shedding some light on this overlooked part of the process can avoid confusion and even provide some savings on the way to a new home.  

Closing Costs

Closing costs include any fees that are paid to finalize a mortgage. They typically range from two to five percent of the property purchase price but can vary by lender, location and other factors.

A portion of the fees will be the cost of getting the mortgage. These are sometimes bundled into one amount called an origination fee and are paid to the lender. Other lenders may list the costs separately as fees for appraisal, a credit report, inspection, tax services, flood certification or similar services. These costs can vary by lender and are worth comparing when looking for a mortgage company. 

However, the majority of your closing costs will probably be related to the title, or legal documentation, for your new home. You can choose the title company overseeing your closing, so taking the time to shop around may lead to significant savings. Title charges will likely include title insurance, which protects you and the lender against issues with the title that arise after closing, documentation fees, closing fees, courier fees, or other administrative costs. 

Prepaid Items

Some of the closing fees simply cover specific costs of homeownership. These prepaid expenses most commonly include payments for homeowners insurance and property taxes. Paying for your initial year of insurance at closing is typical, but you may still be asked to submit several months of premium payments into an escrow account that will go toward your insurance renewal. 

Similarly, a prorated portion of your property taxes will likely be paid into the escrow account. In addition, a part of your monthly mortgage may fund the account going forward to ensure money is available to pay the tax bill when it arrives.  Another prepaid item you could encounter is an interest payment on the loan for the time between closing and the first mortgage payment, which can sometimes be a month or more.  

Closing Disclosure

After your initial loan application, you should receive a loan estimate describing your expected closing costs. Three days before closing, your lender is obligated to provide you with a closing disclosure that lays out the exact amount due from you at closing. It will also display any closing costs that will be paid by the seller, and any amounts you have paid in advance. By reviewing each of these documents carefully, and working closely with your lender to understand them, you can be confident there won’t be an unwanted surprise at your closing. 

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