Closing Costs - Here's What You Need to Know
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Before making an offer on a property, there are some financial decisions to make. What type of financing will you need? FHA or Conventional loan? How much money down? These are questions you may already have answers for. But what about closing costs? What are these and how much will they cost you?
Common closing cost fees include:
Appraisal: Sometimes you will pay this fee at the beginning of the loan process. Regardless if you pay upfront or at closing, this fee covers the cost of an appraiser delivering an appraisal on the property.
Credit Report: The lender will request a credit report during your loan application and this is typically a fee you are responsible for.
Loan Origination: This fee covers loan processing costs for the lender during the application process.
Loan Discount: Sometimes you may have the opportunity to pay a fee to lower your interest rate. If you choose to do so, this is a fee that will be included in your closing costs.
Title Examination and Insurance: Typically this fee includes the title search, title examination, lender’s title insurance, document preparation, owner’s title insurance and other miscellaneous title related fees.
PMI Premium: You will be required to pay private mortgage insurance when making a downpayment that’s less than 20 percent of the purchase price. You can avoid paying PMI by making a downpayment that’s greater than 20 percent.
Prepaid Interest: From the moment you close until your first payment, the interest that will accrue during this period is included in the closing costs. Typically if you purchase a property early in the month, the prepaid fee will be higher than if you purchase it near month’s end.
Escrow Accounts: Escrow accounts are typical in the Louisville Kentucky area. This is an account that holds funds for property taxes and insurance. Think of this as a savings account. A small monthly fee will be added to your mortgage and insurance. This saves the amount of money that will be needed to pay taxes and insurance. Instead of getting hit with a large fee at the end of the year this account lets you spread it out. The mortgage company will pay these fees out of your escrow account. You should consider that these fees will get higher year to year. Taxes and insurance do increase. When they do, the mortgage company will recalculate what is needed on a monthly basis in order to pay the higher taxes and insurance.
Recording Fees and transfer taxes: The state charges a fee for the recording and transfer of property.
Property taxes: The buyer is responsible for paying prorated property taxes for the period starting on the day of the closing to the end of the year.
Keep in mind, sometimes you can negotiate that the seller pay all or a portion of your closing costs. Speak with your real estate professional and lender if this is something you believe you will need before writing an offer.