The Closing Process
Out of the entire home buying process, closing costs are often the least understood pieces.
What to Expect at Closing
Although they tend to vary from lender to lender, closing costs are generally considered any costs tied to the purchases of a new home. Today, these costs range from 2 to 7 percent of the home's purchase price and include three basic categories:
Prepaid expenses include homeowner's insurance, mortgage insurance and the costs to set up an escrow account. An escrow account is when a lender will pay the annual insurance premiums and various taxes on the borrower's behalf. The amount that goes into this account is based on the first year's premiums. An additional amount also is included to pay for future premiums. Prepaid expenses are difficult to determine because they vary based on the type of property and the time of the closing.
A mortgage point is equal to 1 percent of the mortgage loan amount and actually helps reduce the loan's interest rate. For example, depending on prevailing rates, a $100,000 mortgage might be obtained at 7.75 percent with 2 points, or at 8.25 percent with no points. Obtaining the lower interest rate would cut the mortgage payment by about $35 a month, but would require $2,000, or 2 points, up front at closing.
Fees for appraisals, attorneys, credit reports, deed recording, tax services and other miscellaneous expenses make up the out-of-pocket expenses. Usually performed by a third party, these fees for services are directly charged to the borrower. The majority of out-of-pocket fees are necessary and legitimate. However, if the borrower encounters a fee that causes confusion, he or she should ask the mortgage professional about it.
Purchasing a home is one of the largest financials investments you can make. It's vital that you understand it fully and completely so that you avoid unwelcomed surprises and are confident in every step you take towards your new home.
Steps in the Closing Process
The closing can be held at the title company, your lenders office, a real estate attorneys office or another location, depending on the situation.
What you can expect:
You'll review and sign all of your loan documents. Be sure to take your time. Make sure each document is explained clearly, and you understand the terms you're agreeing to. If something is different than what you expected or agreed to, don't sign until the issue is resolved to your satisfaction.
Your lender will distribute (wire) the funds covering your home loan amount to the closing agent.
Depending on your loan terms, you may be required to set up a new escrow account with your lender that will be used to pay your property taxes and homeowners insurance as part of your monthly mortgage payment.
Don't forget that if you have any questions or concerns you can always contact your Loan Officer and they will be happy to explain everything.