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FAQs About Closing Costs: What You Need to Know

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The dreaded closing costs. While they might sound intimidating, closing costs are simply an unavoidable part of purchasing a home in today’s real estate market, and the more you know, the better you can be prepared — and make your closing go a lot more smoothly. 

Here are the answers to your most frequently asked questions regarding closing and what you need to know to keep your ducks in a row.

What Are They?

Above and beyond the purchase price of your new home, you’ll also need to settle up with the various third parties that have performed services during the process before you can sign the paperwork and receive the keys. Many parties provide services for which they need to be compensated, and both buyers and sellers incur closing costs during the course of the transaction. 

What’s Typically Included In Closing Costs?

That depends on a number of factors, including where you live and the value of the property. When you receive your loan estimate and closing disclosure, it should have a detailed statement of each of your closing costs. Standard fees you can expect to see include:

Loan application or origination fees

Often under the header of “origination fees”, these costs include some or all of the following: an application fee, underwriting fees, processing fees, and document preparation fees. “Discount points”, or simply “points”, (an up-front fee to lower your loan’s interest rate), you will typically find here as well. 

Attorney fee

Not every state requires a real estate attorney to draw up and review home purchase contracts, but if yours does, this is where their bill will be sent. 

Closing fee

Also known as an escrow fee, this payment will go to the office handling the closing — your title or escrow company, or your lawyer.

FHA mortgage insurance premium

If you’ve qualified for a Federal Housing Administration loan, they require an upfront mortgage insurance premium of 1.75% of the base loan amount to be paid at closing, or you may have the option to roll it into your mortgage payment. 

Homeowners insurance

Many lenders demand a prepayment of one full year of homeowner’s insurance premiums as part of the closing costs. Those premiums are held in escrow and paid to the insurance company periodically. 

Inspection fee

A comprehensive home inspection is a critical part of buying or selling a home. Only go with a highly-rated, licensed, and insured home inspector. 

Prepaid daily interest

This covers any interest payments that accrue on your mortgage from the date of closing until the due date of your first mortgage payment. A little understood fact is that mortgages are paid in “arrears”, meaning that your June 1 mortgage bill typically covers your May expenses. At closing, you’ll pay the interest from the date of closing until the end of the month, and then not get a mortgage bill for a full month beyond that. 

Property appraisal fee

A crucial part of the mortgage lending process, a professionally accredited home appraisal company will perform a complete valuation of the home and property before the transaction is completed. 

Property tax

In Cook County, we pay our property taxes in arrears (our bill covers obligations from last year.) As such, you’ll see at least two property tax-related items on your closing statement, a proration of the seller’s obligation for last year’s taxes, and two or three months’ worth of future taxes from you to your lender’s escrow. 

Recording fee

The city or county will want to charge you for recording the transfer of public land records. 

Various other charges

Pest control, notary fees, wire transfers, and miscellaneous other processing fees can all be bundled together into your closing costs.

How Much Will I Have To Pay?

Generally speaking, homebuyers can expect to cough up somewhere between 3 and 5% of the purchase price when it comes to closing costs. According to the Real Estate Settlement Procedures Act (RESPA), your loan officer should send you a good faith estimate of your closing costs within three business days of signing your loan application. This estimate should come pretty close to the final amount due, but you never really know what the total will be.

In in-demand areas, like Washington, DC, the Northeast, and the Pacific Northwest, closing costs can climb to nearly $30,000. The Midwest and states with lower populations like Iowa and South Dakota see much lower ones. Here in Illinois, the closing costs should be a little more affordable

Can I Do Anything About Lowering Them?

Anything is possible. Talk to your real estate team. There are a few things you can do that might save you money.

Go over your closing disclosure form with your loan officer. Purchasing a home is a major investment and you deserve to know exactly what you’re paying for. Some unscrupulous lenders or closing agents might try to sneak in superfluous fees and pad the total for an extra buck. If you spot something that doesn’t make sense, ask your loan officer to walk you through it step-by-step.

Some experts say closing at the end of the month can save you some cash. And if you’re really not feeling the whole closing costs thing, sometimes they can partly be rolled into your mortgage. However, this can raise your interest rate, give you a distinctly higher monthly payment, and isn’t always possible in today’s seller’s market. 

The Bottom Line

Buying a house of your very own is like a dream come true, but it can also be a stressful, headache-inducing, and confusing process. Dealing with real estate people, mortgage brokers, title companies, lawyers, escrow, closing costs — it can all be a little intimidating, especially for a first-time homebuyer. That’s why I’m here to answer your every question, every step of the way.


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