At closing, you settle all of the financial details associated with obtaining a new mortgage:
- f you are purchasing a property, you'll receive the keys to your new home
- If you are refinancing, you will pay off your current mortgage and obtain a new one
Closing may take place at the title company, the office of a real estate agent, your lender's office or, if you are refinancing, in your own home.
What Are Closing Costs?
Closing costs are fees paid at closing (settlement). By law, closing costs must be listed on a document called the Closing Disclosure.
At closing, the borrower has the opportunity to carefully review the Closing Disclosure to confirm all of the costs and details of the loan.
Specifically, what are closing costs? Here are some examples. (Depending upon your loan type and other factors, some of these closing costs will not apply and/or there may be additional costs not listed here.)
- Application Fee
- Underwriting Fee
- Appraisal Fee
- Credit Report Fee
- Flood Determination Fee
- Pest Inspection Fee
- Survey Fee
- Title Service Fee
- Lender's Title Insurance
- Owner's Title Insurance
- Recording Fee
- Transfer Tax
- Homeowners' Insurance Premium
- Mortgage Insurance Premium (MIP) or Private Mortgage Insurance (PMI)
- Prepaid Interest
- Property Taxes
- Homeowner Association Fee
- Attorney Fees
- Real Estate Agent Fee (when buying a house)
Typically, these costs must be paid for with a cashier's check. The borrower may also need to bring additional cash to close to cover the down payment.
How Much Are Closing Costs?
The answer to the question, "How much are closing costs?" will depend on where you live, how much down payment you are making and whether you are buying a home or refinancing.
Typically, closing costs range from 2% to 6% of the purchase price or appraised value of your home.
Who Pays Closing Costs?
When you are purchasing a home, you are responsible for closing costs, but the actual answer to "Who pays closing costs?" will depend on the sales agreement. The buyer may agree to pay a higher sales price if the seller pays mortgage points, for example.
What Are Mortgage Points?
Points are interest charges that you pay up front when you get a mortgage. One point is equal to 1.00% of the total loan amount.
Points are also called discount points or loan origination fees. You can pay points to get a lower interest rate; also paying points can lower your monthly mortgage payment.
Can Closing Costs Be Rolled Into a Mortgage?
With a refinance mortgage, the borrower may have the option of no out-of-pocket expenses at closing. For example:
- With a VA Streamline Refinance (also called an Interest Rate Reduction Refinance or IRRRL) closing costs can be rolled into the new loan, or the lender pays closing costs
- With an FHA Streamline Refinance, the lender actually charges a slightly higher interest rate instead of requiring you to pay closing costs in cash
Can closing costs be rolled into a mortgage for a purchase loan? While this is possible with certain special loan programs offered by the USDA and some states, it is not very common.
Prepare for Closing on a House
To prepare for closing on a house, make sure you have the items you'll need to bring. Here are some examples:
- Government-issued photo ID for borrower and co-borrower
- Binder for homeowners' insurance (hazard insurance) and paid receipt
- Cash necessary for closing costs (typically a cashier's check; not a personal check)
There will probably be other items as well.
The borrower and any co-borrowers attend closing in person unless a power of attorney (POA) has been obtained in advance. Other people at the closing table may include:
- A closing agent (also called a settlement agent or escrow agent)
- The title company representative
- The seller and any real estate agents involved (if you are purchasing a home)
- In some instances, an attorney
Although closing may only take an hour, consider setting aside extra time; you will be signing many documents. Your closing agent will explain what you are signing and you will have the opportunity to ask questions.
What Documents Do You Sign at Closing?
Here are some of the documents signed at closing. Depending on your state, county or municipality, these documents may have different names or take different forms:
- The Deed. This document transfers ownership of the property from the seller to the buyer. The closing agent and/or an attorney will review the deed and the title insurance commitment to make sure the legal descriptions match, because errors could affect your ownership of the property.
- Lender's title insurance. This protects the lender up to the amount they are lending, if someone later sues and says they have a claim against the property.
- Owner's title insurance. This protects your financial investment in the home, if someone later sues and says they have a claim against your property.
- The Note. This is the contract in which you promise to repay your mortgage loan. It specifies the terms and conditions of your loan and how you will be required to repay it.
- The Mortgage or Deed of Trust. In this document, you pledge your home as collateral for the mortgage loan. (Some states use a mortgage and other states use a deed of trust.)
The closing agent makes sure all necessary documents are signed and verified, and the money from the sale is properly distributed in the case of a purchase loan. After closing, the closing agent will take care of recording the deed in the county where the property is located.
Make sure you read and understand all of the documents you are signing at closing, as well as the closing costs listed on the Closing Disclosure form. At closing, you will have the opportunity to ask questions and feel comfortable about the transaction.
Buying a home or refinancing a mortgage is an important financial decision. If you are thinking about buying or refinancing a home, speak with a licensed loan officer at Freedom Mortgage to learn more about the options available to you today.