What Are Closing Costs?
You finally found the house of your dreams. You signed a contract and got approved for a mortgage. You’ve even hired the movers. Now comes the most important part: the closing day.
On closing day, all parties will sign a few important documents that will officially seal the deal and ownership of the property will be transferred to you.
This is your opportunity to make any last-minute changes, so make sure to do some research beforehand.
When you shop for the best lender, don’t make your decision on the interest rate alone. Federal law mandates that you must be provided a “good faith estimate” within three days of the mortgage application. Generally, your closing costs will run between 3 to 5 percent of the loan amount.
Your Role On Closing Day
At closing, your participation will involve a couple of steps:
- Sign legal documents.
- The agreement between you and your lender regarding the terms and conditions of the mortgage and the agreement between you and the seller transferring ownership of the property.
- Pay closing costs and escrow items.
- Borrowers handle the numerous fees associated with obtaining a mortgage and transferring property ownership in 1 of 2 ways: They either roll them into the principal balance of the new loan or agree to pay higher interest rates and have their lenders foot the bill. Some buyers may have to pay these out-of-pocket fees.
What Happens at Closing
Usually, closings are held at the offices of one of the representatives involved: the title company’s, an attorney’s or the lender’s.
Here’s what happens:
- Review and sign all your loan documents. Make sure you understand the terms of each document.
- Provide documentation of homeowners insurance and inspections
- Give a cashier’s check to cover the down payment, closing costs, prepaid interest, taxes and insurance. You could also send these funds in advance.
- Your lender distributes the funds covering your home loan amount to the closing agent.
- Depending on your loan terms, you may also be required to set up an escrow account to cover property taxes and homeowners insurance in addition to your monthly mortgage payment.
Three Important Items to Review and Sign During Closing:
Closing costs are costs associated with your loan, and it’s important to budget correctly for them. Closing costs fees may include discount points, recording fees, loan origination fees, appraisal charges, notary fees, attorney fees, title insurance and more.
You should get a sense of how much your closing costs will be when your lender provides you with an initial Loan Estimate. When your loan is approved, you will receive a Closing Disclosure, which lists your finalized closing costs.
You may pay some fees in your Loan Estimate and Closing Disclosure before closing day, such as those associated with credit reports. For the rest, ask your closing agent what payment methods are acceptable.