Understanding Closing Costs: What You Need to Know
When purchasing a home, many buyers focus on their down payment, but closing costs are an important part of the process, too. These fees cover various services required to finalize your home loan, and understanding them upfront can help you budget effectively and avoid surprises on closing day.
What Are Closing Costs?
Closing costs are the fees and expenses paid at the end of a real estate transaction before the home officially becomes yours. These costs typically range from 2% to 5% of the home’s purchase price and include lender fees, third-party service charges, and prepaid costs.
What's Included in Closing Costs?
Closing costs can vary, but here are some of the most common charges you might see:
- Loan Origination Fees - Charged by the lender to process and underwrite your mortgage.
- Appraisal Fee - Covers the cost of a professional home appraisal to determine the property’s market value.
- Credit Report Fee - A small fee for pulling your credit report as part of the loan approval process.
- Title Insurance & Title Search - Protects against potential ownership disputes and ensures a clean title transfer.
- Home Inspection Fee - If required, this ensures the property is in good condition.
- Prepaid Property Taxes & Homeowners Insurance - Lenders often require buyers to pay these costs in advance.
- Recording Fees - Paid to the county to record the official change in ownership.
- Escrow Fees - Paid to the third party handling the closing process, such as a title company or attorney.
How to Reduce Closing Costs
While closing costs are unavoidable, there are a few ways to potentially lower them:
- Shop Around for Lenders – Compare loan offers to find the best terms and lower fees. Sirva Mortgage offers a variety of loans at competitive rates.
- Negotiate with the Seller – In some cases, sellers may be willing to cover part of your closing costs as part of the deal.
- Ask About Lender Credits – Some lenders offer credits in exchange for a slightly higher interest rate, reducing upfront costs.
- Choose Your Own Service Providers – You may be able to save money by selecting your own title company, inspector, or insurance provider.
When and How Are Closing Costs Paid?
Closing costs are typically paid at the closing meeting, where you sign final paperwork and officially take ownership of the home. You'll receive a Closing Disclosure at least three business days before closing, detailing all final costs and the amount you need to bring to the table.
Most buyers pay closing costs via wire transfer or a certified bank check, so it's important to confirm payment details with your lender and closing agent ahead of time.
Plan Ahead for a Smooth Closing
Being informed about closing costs can help you feel confident and prepared when purchasing a home. Work closely with your lender to understand what to expect, and review your Loan Estimate early in the process to ensure there are no surprises down the line.
If you have any questions about closing costs or need guidance on your mortgage, our team is here to help!
Glossary of Mortgage Terms
- Appraisal – An assessment of a property's value based on recent sales of similar properties.
- Borrower – An individual who takes out a mortgage loan and agrees to repay it with interest.
- Certified Bank Check – A bank-issued check guaranteeing sufficient funds for payment.
- Closing Disclosure – A document outlining final loan terms and closing costs, provided at least three business days before closing.
- Condition – A requirement that must be met for loan approval, such as providing additional documentation.
- Fixed-Rate Mortgage – A loan with an interest rate that remains constant for the life of the loan, commonly available in 15- or 30-year terms.
- Loan Estimate – A breakdown of estimated loan costs provided within three days of a loan application.
- Loan Closer – A professional responsible for coordinating the final loan paperwork and closing process.
- Loan Consultant – An expert who helps borrowers find the right loan and navigate the mortgage process.
- Loan Processor – The person who gathers and verifies financial documents before loan approval.
- Lock (Securing an Interest Rate) – The process of committing to a specific mortgage interest rate for a set period before closing.
- Points – Fees paid to the lender in exchange for a lower interest rate, with each point equaling 1% of the loan amount.
- Power of Attorney (POA) – A legal document allowing one person to act on another’s behalf in financial matters.
- Purchase Agreement – A contract that outlines the terms and conditions of a home sale.
- Title – Legal proof of property ownership.
