When buying or selling a home, you may hear the term closing costs thrown around the real estate agent and bank. You might be curious to know what these costs are and why they are so important, and it can be difficult to get closing costs explained in a way you understand easily.
From knowing whether your purchase is subject to an escrow deposit to knowing who pays the appraisal fee, it can be confusing if you’re not familiar with the process. These fees, which apply to both buying and selling homes, may seem inconsequential, but they could actually make all the difference as far as how much money leaves your bank account at the end of the process.
Closing costs – or the fees associated with the purchase of a property – are paid at closing, when the property changes hands. Some of the most common closing costs are explained here for both buyers and sellers in Boston.
When applying for a mortgage, which is one of the biggest purchases you’ll make, there are a number of associated costs. Some fees are very common and others might be less obvious. This is a fee that covers the cost for the lender to process your application for a mortgage. Some lenders collect this fee upfront, but many wait until closing to collect it. You should be told upfront how much your lender charges as an application fee.
Before you submit a mortgage application, ask your lender what this fee covers, and get these closing costs explained. It can include items such as a credit score, but it also can cover things such as a property appraisal. Knowing just what the application fee covers can help you better anticipate other potential closing costs.
When you purchase a home, many lenders require an appraisal by a professional. This appraisal is used to determine the fair market value of the home and puts it up against properties of similar size and in a similar location to yours.
Most often, the buyer pays the appraisal fee, but this may be an item you can negotiate in your contract. The cost of an appraisal can vary greatly depending upon the property and state, but it can generally be expected to cost at least $500 in Massachusetts. When working with a mortgage lender, this is often an item that is paid in advance of the closing, or sometimes will be added into the closing costs.
This pays for an attorney to review all your closing documents, and the attorney can work on behalf of either the buyer or the lender. Having an attorney look over the closing documents isn’t required in all states, but it’s often a good idea to have a third party look over the documents so you know that everything included in them is legal and typical.
A closing fee is paid to the title company, escrow company, or attorney for conducting the closing. This person acts as a neutral third party in the transfer of the home, and some states require that a real estate attorney be present even if you’re using a title or escrow company.
You can get these closing costs explained by your lender or the person managing the closing.
This covers the cost of transporting documents so that a loan transaction can be completed as quickly as possible.
Home inspections often are required by lenders, but many sellers also elect to get their own inspections. This fee can be negotiated between the buyer and seller to determine who pays it.
In an extreme seller’s market like we are seeing post-COVID, many buyers are waiving a home inspection contingency clause (side note, extremely low inventory and the waiving of inspections has certainly cut into the home inspection industry of late!)
This fee covers the lender’s administrative costs, typically adding up to about 1 percent of the total loan. Some mortgages come without origination fees, so look around if you want to find a way to save this fee.
PRIVATE MORTGAGE INSURANCE (PMI)
PMI stands for private mortgage insurance, and is a PMI is a special type of insurance that protects the lender in case the borrower stops making monthly payments
If you’re making a down payment of less than 20% of the purchase price, you likely will be required by the lender to pay PMI. This is something that can be added to your monthly payment and some lenders require that you pay the first month’s PMI at closing.
When a home changes hands, that change must be recorded by a local recording office. This recording often comes with a fee.
Registering a property transfer in most states is handled by a local county office, called the “recording office.” Recording fees vary from state to state and are based on many different factors. The type of property, the current owner’s identity and even the recording agent can influence how much a fee will be.
This fee is paid to the title company, who does a search on the property’s records to make sure that the sale will be legal. This is another fee that may be negotiable between buyers and sellers.
If you need your Boston closing costs explained, or you just want experienced help in the home purchase or sales process, contact us at NextHome Titletown Real Estate today at (617) 657-9811!
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