Closing costs for home refinancing or purchases are often misunderstood and frustrating for the buyer and seller (who is probably very soon going to be a buyer). Closing costs are assessed once a purchase agreement is finalized with the seller and/or their agent. The various costs will vary by county, state and lending institution. However, there are a number of fairly standard closing costs that we will discuss and explain so that you won’t be taken for a ride the next time you purchase or refinance you loan.

Be aware that all closing costs must be disclosed in a good faith estimate – meaning there should be no unexpected or hidden fees that show up when the paperwork is signed and the deal sealed. If there are, this is often referred to as “bait and switch,” an unethical practice that unfortunately is sometimes used by mortgage brokers or lending institutions to make additional money from a mortgage loan.

Standard Closing Costs

Points: A point is a percentage point on the value of the loan that is paid up front to buy down the loan rate. The number of points will depend on the type of loan (expect 1 to 3 points on a standard loan and anywhere from 3-6 points on a hard money or bad credit loan). Points are assessed in the closing costs.

Loan origination fee: This is the fee paid to the lender or lending institution to cover the mortgage processing, essentially all of the paperwork.

Private mortgage insurance: Often referred to as the PMI. If a borrower does not wish, or is unable to, put 20% of the purchase price down on a home loan, they will usually be required to carry private mortgage insurance. PMI protects the lender should the borrower default on his or her loan. Private mortgage insurance usually costs one-half of 1 percent of the amount of the loan. Once a homeowner has at least 20% equity in the home, they are no longer required to carry PMI.

Title insurance: Title insurance is paid by the buyer in the event that the seller does not actually own the property that they are selling or if there is a lien or additional ownership claim on the property. Title insurance will vary by state and count, and is based on property value.

Appraisal Cost: This is the cost paid to an independent appraiser who determines the fair market price of a property prior to its sale. Appraisals can vary in value, depending on how thorough the appraiser is (appraisals can be based on only comparative sale prices for comparable homes in that area). The appraisal value is obviously important to all parties involved in the sale – for the lending institution, the appraisal value determines whether the borrower has sufficient collateral for the loan.

Escrow Tax Deposits: These will vary widely from state to state.

Escrow Fees: The title company assesses these fees to pay for its costs.

Property survey: If any questions or ongoing disputes exist relating to boundary issues, plot layout, etc. the lender may require a property survey.

Homeowner’s insurance: This type of insurance is not included in the closing costs, although it is a cost that a home owner will incur as soon as they move into their new home. property value, location, type of home and numerous other factors. Homeowner’s insurance is often relatively low when compared to other types of insurance.

Home Inspection: This is another cost that is not including in the closing costs, but will come out of the buyer’s pocket. The home inspection is an integral part of purchasing a home as the home inspector may find significant problems with the home that must be negotiated prior to the purchase agreement.

Other closing fees may include transfer fees, a credit report fee and recording fees.

Other Important Reminders

Closing costs are many and seem to keep popping up when you are purchasing a home (certainly your first). There is no single way that closing costs are assessed – sometimes the buyer and seller will split a certain cost and other times the lender will pick up one or more taxes and/or costs. It all depends on negotiation between buyer, seller, lender and the particular laws that govern the property state.

When all is said and done, closing costs will total between 2 and 7 percent of the purchase price of the property.