What Are Closing Costs?

You've found your dream home, the seller has accepted your offer, your loan has been approved and you're eager to move into your new home. But before you get the key, there's one more step--the closing.

The closing is the process of passing ownership of property from seller to buyer. As a buyer, you will sign what seems like endless piles of documents and will have to present a down payment and various closing costs. It's the fees associated with the closing that can seem like a mystery to many buyers who aren't working with the best representation. 

As a responsible buyer, you should be familiar with these costs that are both mortgage-related and government imposed. Although many of the fees may vary by location, here are some common fees:

Appraisal Fee: This fee pays for the appraisal of the property. You may have this fee rolled into your closing costs.

Credit Report Fee: This fee covers the cost of the credit report requested by the lender. This too may be included in the costs paid at the closing table.

Loan Origination Fee: This fee covers the lender's loan-processing costs. 

Title Insurance Fees: These fees generally include costs for the title search, title examination, title insurance, document preparation and processing fees.

PMI Premium: If you buy a home with a low down payment, a lender usually requires that you pay a fee for mortgage insurance. This fee protects the lender against loss due to foreclosure. Once a new owner has 20 percent equity in their home, however, he or she can apply to eliminate this insurance.

Escrow Accounts: In locations where escrow accounts are common, a mortgage lender will usually start an account that holds funds for future annual property taxes and home insurance. 

Recording Fees and Transfer Taxes: This expense is charged by most states for recording the purchase documents and transferring ownership of the property.

Make sure you consult a real estate professional in your area to find out which fees--and how much--you will be expected to pay during the closing of your prospective home. Keep in mind that you can negotiate these costs with the seller. In some instances, the seller might even agree to pay all of the settlement costs.