Mortgage settlement costs, aka closing costs, are the costs paid at the transaction-closing event that legally transfers the home from seller to buyer. Closing costs are typically around 2-to-4% of the mortgage loan.
Generally, the buyer pays most, if not all, of the costs listed below. However, you can negotiate with the seller to absorb some of these costs, especially if the seller is under pressure to sell to cover other expenses.
- Processing Fee – The fees covering the lender's initial costs for processing the loan. Fees to access the credit report and legal document preparation costs may be included in this fee or broken out separately.
- Points – An optional upfront fee that you can pay to reduce your interest rate by a certain percentage. Points are in increments of 1% of the amount of your loan, and, as of 2014, a typical interest rate reduction is around 0.25% per point. These may be folded into your mortgage instead of being paid at closing.
- Loan Origination Fee – Charges for additional work in preparing your mortgage. Ask your lender what these charges cover if there are questions. For example, an origination fee as a percentage of the mortgage is arguably a point, and there may be tax issues to consider in that case.
- Appraisal Fee – The cost to acquire an updated value for your home through a qualified appraiser.
- Title Search/Title Insurance – These are costs to verify the current ownership of the house, and insurance that protects both you and the lender in case an ownership issue is discovered after the sale. You will be required to buy title insurance that covers the lender, and you may also opt to buy title insurance that covers you as the buyer.
- Survey – A new survey is usually required to verify that there are no property changes since the last survey.
- Taxes and Homeowner's Insurance – Taxes are primarily property taxes – but any school taxes, city taxes or other local taxes are also included. As for homeowner's insurance, the buyer must provide proof of insurance for closing to proceed, and typically, the first year's premium is required at closing.
These two expenses are typically placed in an escrow account established to cover your initial property tax and homeowner's insurance payments.
- Deed Recording Fees – The fee to have your deed officially recorded with your county clerk and to change the information so property taxes can be correctly assessed.
- Inspection Fees – Structural and pest inspections are generally required to verify that the house is free of defects or infestations prior to transfer.
- Attorney's Fees – Separate from document preparation fees, these are other costs for your lawyer's participation in the closing process.
- Prepaid Interest – This covers the accrued interest between the closing date and the first mortgage payment.
- Private Mortgage Insurance (PMI)– Generally PMI is required for home purchases with any down payment amount below 20%. PMI will be included in your mortgage payments as long as it is required. Any portion at closing will be included in the same escrow account that handles your taxes and homeowner's insurance.
While sellers can assume some of these payments through negotiation with buyers, sellers do have a few other costs – the largest one being the commission paid to the real estate agent. There are also transfer taxes imposed by state/county/city governments, notary fees for all the notarized documents, fees for the buyer's attorney, and costs associated with paying off the seller's original mortgage on the property.
While it may seem like an overwhelming list, you should receive an explanation of all fees before closing. These cost items may be named differently in your closing documentation, but they should still fall into the basic categories above. Make sure you understand them all before signing any mortgage document. It can be a painful process, but signing documents you don't understand can wind up being a lot more painful.