Closing costs are the extra expenses you need to pay when you're buying a house and closing the deal. Think of it as the final step before you officially become the owner of your new home.

 

During the closing, also known as the settlement, ownership of the property moves from the seller to you, the buyer. It can seem overwhelming because there are a lot of documents to sign, and you may need to bring a big check for the down payment and various closing costs.

 

Many buyers don't really know what these costs cover, but it's important to understand them as a responsible buyer. They can include fees related to your mortgage and fees imposed by the government.

 

Here are some common closing costs:

 

*  Appraisal Fee: This pays for someone to evaluate the property's value.  It is a checks and balance process to ensure you don’t unknowing overpay for a property.

 

*  Credit Report Fee: Covers the cost of checking your credit history as required by your lender.

 

*  Loan Origination Fee: This fee covers the cost of the lender's loan-processing. The fee is typically one percent of the total mortgage.

 

*  Discount Points: This may be an option to help lower you interest rate on your loan.  By paying ‘points’, you can lower your interest rate by a ¼ percent or even more.  Each point you purchase equals one percent of the total loan.

 

*  Title Insurance Fees: These fees generally include costs for the title search, title examination, title insurance, document preparation and other miscellaneous title 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 more than 20 percent equity in their home, he or she can normally apply to eliminate this insurance.

 

*  Prepaid Interest Fee: This fee covers the interest payment from the date you purchased the home to the date of your first mortgage payment. Generally, if you buy a home early in the month, the prepaid interest fee will be substantially higher than if you buy it towards the end of the month.

 

*  Escrow Accounts: In places where escrow accounts are common, a mortgage lender will usually create an account that holds funds for future annual property taxes and home insurance. This is called an Escrow Account.  The lender will typically hold at least one year plus 2 months of homeowners insurance premium.  In addition, will hold taxes for the remainder of the year at purchase plus two months.  If five months have passed, the escrow account will hold seven months of taxes.

 

*  Recording Fees and transfer taxes: These fees are 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 home.  Having a real estate professional in your corner may help you negotiate these costs with the seller.  In some cases, the seller might even agree to pay all of the settlement costs.