Closing Costs

Closing costs and the amount of money you will need to close on your home are two different things. Generally speaking, closing costs are items payable in connection with the loan and title charges; in addition to these costs, you will also need to plan for prepaid interest and insurance and an escrow account.

The mortgage company may have fees for origination and processing payable directly to them, but there may also be fees payable to third parties for services such as appraisal, tax service, and credit reports.

In addition to the items payable in connection with the loan, the mortgage company will likely require you to pay for certain items in advance, such as a one-year homeowner's insurance policy, some of your first month's interest, and a few months of mortgage insurance if you are financing with an FHA loan or are borrowing more than 80% of the purchase price.

In most cases, your lender will also want you to place funds on reserve to fund your escrow account. This is not really a closing cost since it's not a fee. Rather, it is your money, placed on deposit with the lender to pay your taxes and insurance at the end of the year.

Title charges are charges for services connected with providing clear title, such as title examination, clearing title to the property, preparing and issuing the title policy, and conducting the closing. Basic title policy premiums are regulated by the state and will not vary from one title company to another; however, other charges, such as closing fees and document preparation, will.

The bottom line is that in addition to your down payment, you should plan for these charges and reserves to complete your purchase.