Understanding Closing Costs

Closing costs are simply the fees associated with 1) purchasing a home, 2) borrowing money, and 3) preparing paperwork to finalize the sale. Your total closing costs will vary depending on where your new home is located, what type of property you are buying, the price of your home and the complexity of the transaction.

It is extremely important that you work closely with your buyer’s representative in the early stages of your home search to estimate what these costs could be, since closing costs can easily represent thousands of dollars.

The main categories are:

  • Points — Money paid by a borrower to the lender in exchange for a lower interest rate. Each point equals 1% of the loan amount.
  • Mortgage Application Fees — Charged by the lender to cover the costs of processing a loan application. It’s sometimes paid up front at time of application; otherwise, it’s included in the closing costs.
  • Appraisal Fees — The cost of paying a professional to assess the fair market value of the property. Usually required as a condition of the loan.
  • Inspection Fees — The fees charged for home, pest and other inspections. Lenders sometimes require inspections to verify that the property is in good condition and will retain its collateral value.
  • Survey Fee — The charge for confirming the lot size and shape and to check for any encroachments.
  • Title Search Fee — Paid to Chicago Title to verify that the home’s title is “in the clear”, (i.e. that there are no liens or outstanding claims on the property).
  • Title Insurance Premium — The lender’s policy covers only the lender and is required in most cases. A buyer’s policy is optional but highly recommended, and is usually very affordable if purchased at the same time as the lender’s policy.
  • Recording Fees — Charged by the local register of deeds to make the transfer of property a matter of public record.
  • Pre-paid Property Insurance — The first full year’s property insurance premium, paid in advance, directly to the homeowners insurance company.
  • Pro-rata Property Taxes — An adjustment to ensure that both the seller and the buyer pay their share of the annual property tax, proportionate to the percentage of the year that each has ownership of the property.
  • Pro-rata Interest — An adjustment to cover the interest on the loan for the number of days until the first payment is due.