What Are Closing Costs and How Can You Negotiate Them?

You’ve found your dream home, the seller has accepted your offer, your loan has been approved, and you’re eager to move into your new home. But before you get the key, there’s one more step: the closing.

Also known as the settlement, the closing is the process of transferring ownership of the property from the seller to the buyer. However, many buyers find the closing process confusing, especially when it comes to the associated fees. They often end up paying thousands of dollars without fully comprehending what they’re being charged for.

To be a responsible buyer, it’s essential to familiarize yourself with these mortgage-related and government-imposed closing costs. Although specific fees may vary depending on your location, here are some common expenses you should be aware of:

1. Appraisal Fee: This fee covers the cost of property appraisal. You might have already paid this fee during your loan application process.

2. Credit Report Fee: The credit report fee accounts for the lender’s expense of obtaining your credit report. You may have already paid this fee when you applied for your loan.

3. Loan Origination Fee: This fee encompasses the lender’s loan-processing costs and is typically one percent of the total mortgage amount.

4. Loan Discount: If you choose to pay points to lower your interest rate, you’ll incur this one-time charge. Each point you purchase equals one percent of the total loan.

5. Title Insurance Fees: These fees cover various expenses such as title search, examination, insurance, document preparation, and other miscellaneous title fees.

6. PMI Premium: If you buy a home with a low down payment, the lender will usually require you to pay a fee for mortgage insurance. This fee safeguards the lender against foreclosure-related losses. Once you attain 20 percent equity in your home, you can typically request the removal of this insurance.

7. Prepaid Interest Fee: This fee accounts for the interest payment from the date of purchasing the home to the date of your first mortgage payment. If you buy a home early in the month, the prepaid interest fee will be higher compared to a purchase made towards the end of the month.

8. Escrow Accounts: In areas where escrow accounts are common, mortgage lenders usually establish an account to hold funds for future property taxes and home insurance. During closing, they collect at least one year’s advance payment and two months’ worth of homeowner’s insurance premium. Additionally, taxes equivalent to approximately two months more than the elapsed months in the year are paid.

9. Recording Fees and Transfer Taxes: Most states charge this expense for recording purchase documents and transferring property ownership.

It’s crucial to consult a real estate professional in your area to determine which fees you’ll be expected to pay during the closing process of your prospective home. Keep in mind that you can negotiate these costs with the seller during the offering stage. In some instances, the seller might even agree to cover all of the settlement costs. By understanding closing costs and exploring negotiation opportunities, you can ensure a smoother and more informed home buying experience.