Buying a Home: What Are Closing Costs?

Closing costs…what are they? Most of us have paid them at least once, some of us actually know what they are, and several are too intimidated to ask. Simply put, closing costs/fees are the various costs associated with closing a loan on your home. Certain fees are paid to your lender and others to third-party service providers. The different types of closing costs can include:

Lender Fees

These are the fees that are paid to your lender to cover the costs of processing your loan, sometimes known as application, origination, and commitment fees. These fees cover costs associated with checking your credit and underwriting your loan. Often, lender fees are nonrefundable due to the work that goes into completing the application.

Third-Party Fees

These fees are paid to third parties performing services as part of your loan, for example fees paid to:

• Title companies to obtain a title insurance policy on the home;
• Appraisers to ascertain the value of the home;
• Government offices for recording the security instrument or other required documents as well as paying any associated tax.

Simply put, closing costs/fees are the various costs associated with closing a loan on your home.

Impound/Escrow Amounts

When your lender will pay your property taxes and homeowner’s insurance on your behalf, part of your monthly payment will include money deposited into an escrow account. You may be expected to put a certain portion of funds in your escrow account at closing to open the account. The advantage here is peace of mind. You don’t need to worry about budgeting for these expenses every month. Let your lender take care of the paperwork for you.
If you prefer not to pay cash to cover the closing costs, you can often pay a higher interest rate to cover the closing costs or have the closing costs added to the amount of the loan. For example, if the loan amount is for $150,000, and the closing costs are $4,500, you pay a higher interest rate and receive a credit of $4500 to cover the closing costs or add the closing costs to the loan amount in which case you would actually be borrowing $154,500 total.