Being a first-time home buyer, you’re probably getting sticker shock everywhere you turn at the costs you’re responsible for. Understanding what closing costs are will ease the process and make it a little easier to navigate the home buying process from start to finish.
Escrow
An escrow account is required at closing by all lenders to ensure that you have enough money to pay for both taxes and mortgage insurance if required. You’ll need to have enough to cover the taxes for the next billing period along with the amount to cover taxes from the date of closing until that point. Expect to pay private mortgage insurance or PMI if you put down less than 20 percent of the loan. Since FHA loans only require a very small down payment of 3.5 percent, it is necessary to carry PMI on these loans.
Origination
The amount of the origination fee varies but generally averages about one percent of the total loan amount. It covers the loan officer’s process of completing the loan, underwriting, originating and processing the paperwork. Some lenders may offer better rates than others, so it pays to look for good faith estimates.
Inspections
Inspections are critical in the home buying process to ensure you aren’t buying something that requires significant work down the road such as a structural problem with the foundation. Companies like State Bank of Cross Plains will advise you to get an inspection to protect your investment before it's time to close.
Appraisal and Survey
An appraisal needs to be done on the home before you can be approved for a mortgage. The bank needs to know how much the home is worth before allowing you to borrow the money. Expect to pay anywhere from $200-$400 for an official appraisal depending on where the home is located and how large it is. A land survey is something else that needs to be done to know exactly where the property lines run
Closing on your home is both an exciting and stressful time. Being uncertain of how much everything is going to cost you and why you need to pay will only make it more difficult. Don’t be afraid to ask questions or request an explanation of what a particular fee is for. Be prepared when you walk into the closing by having realistic expectations for the dollar amounts for the checks you’re about to sign to officially take ownership.