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What Are Closing Costs?

Posted by  on Apr 16, 2009
 
The mortgage closing or mortgage settlement causes more confusion and uncertainty for the borrower than any other, of all the steps in buying a home or refinancing a loan. A settlement may involve several people, and a variety of documents and fees. Once you understand what is involved, you may find the entire closing process far simpler than you might have imagined. While this brochure focuses on settlements in home purchases, much of the information also will be useful if you are refinancing a mortgage.

The Closing process begins weeks or even months before, legal ownership is attained. The process follows an outline set largely by a buyer's original offer to the seller of the house. That offer becomes the sales contract, once it's signed by the seller, and it covers many of the key elements of the settlement or closing. Many buyers may think of settlement as the last step to becoming the legal owners of their new home.

The more you know about the process, the better your chances are for saving money at settlement time. Closing practices differ from one locality to another regarding who pays what closing costs. Across the country, however, buyers and sellers are free to negotiate certain fees. In some cases, certain costs can be shifted, it may affect the sale price of the property. In most states, costs can also be cut by shopping around among providers of the settlement services.

There are some universal closing costs. For example there are charges for establishing and transferring ownership. These include title search, title insurance, related legal fees, and fees for conducting the settlement. Other costs include amounts paid to state and local governments. These include city, county and state transfer taxes, recordation fees, and prepaid property taxes. Some simple but overlooked costs are the costs of getting a mortgage. These include survey, appraisals, credit checks, loan documentation fees, notary charges, loan origination, commitment and processing fees, hazard insurance, interest prepayments, and lender's inspection fees.

The costs of getting a mortgage may be imposed by your lender as early as when you apply for your loan. Mortgage-related closing costs include application fees, appraisal fees, surveying and insurance. Buyers who make down payments less than 20 percent (and in some cases 30 percent) of the value of the house may be required by lenders, and by law in some states, to take out mortgage insurance. The policy covers the lender's risk in the event the buyer fails to make the loan payments. Premiums are typically paid annually from an escrow or reserve account, or in a lump sum at closing. A buyer, whose mortgage is insured by FHA or guaranteed by VA, will have to pay FHA mortgage insurance premiums or VA guarantee fees.

The mortgage closing or mortgage settlement causes more confusion and uncertainty for the borrower than any other, of all the steps in buying a home or refinancing a loan. But once you understand what is involved, you may find the entire closing process far simpler than you might have imagined. While this brochure focuses on settlements in home purchases, much of the information also will be useful if you are refinancing a mortgage.

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