Understanding Closing Costs Breakdown & Budgeting
Welcome to Week 6 of The Mortgage Minute! This week, we’re diving into Closing Costs, an essential part of every real estate transaction. Whether you're a homebuyer, seller, or a mortgage professional, understanding how closing costs work can help avoid surprises and ensure a smoother transaction.
What Are Closing Costs?
Closing costs are the fees and expenses in addition to your down payment on a real estate transaction. They are typically paid at closing and can vary based on loan type, property location, and lender requirements. Closing costs generally range from 2% to 5% of the loan amount but be sure to speak with an expert about your situation to determine what costs would look like for you.
Breakdown of Common Closing Costs
Here’s a look at the key components that make up closing costs:
1. Lender Fees
Origination Fee: Charged by the lender for processing the loan.
Discount Points: Optional upfront fee to lower the interest rate.
Underwriting Fee: Covers lender expenses for evaluating the loan application.
2. Third-Party Fees
Appraisal Fee: Required to assess the home’s market value.
Credit Report Fee: Covers the cost of pulling the borrower’s credit report.
Title Search & Title Insurance: Ensures there are no liens on the property and protects against future ownership disputes.
3. Prepaid Costs
Property Taxes: If setting up an escrow account, your lender will need to have reserves set aside for property taxes due on an upcoming tax bill.
Homeowner’s Insurance: The first year’s premium of insurance will be collected at closing.
Prepaid Interest: Covers the interest due from the date of closing until the first mortgage payment.
4. Government Fees
Recording Fees: Charged by the local government to record the property transaction.
Transfer Taxes: Some states and municipalities charge taxes for transferring property ownership.
Budgeting for Closing Costs
Understanding how to plan for closing costs is crucial for borrowers. Here are a few strategies:
✔ Request a Loan Estimate (LE) or Fees Worksheet from your Loan Officer: This document provides a breakdown of estimated closing costs upfront.
✔ Negotiate with the Seller: In some cases, sellers may offer to cover part of the buyer’s closing costs.
✔ Consider Lender Credits: Borrowers can opt for a slightly higher interest rate in exchange for lower upfront costs.
✔ Be Aware of Prepaid Costs: Knowing how much will be due in advance can prevent last-minute surprises.
The key is to put together a good plan before beginning the search for your new home.
Are you ready to continue the conversation? Reach out to one of our licensed loan officers today at the link below:
https://www.cohenmortgage.com/get-a-quote
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