You will have to pay closing costs when you buy a house. It’s part of the process that isn’t fun (let’s face it, nobody likes paying money), but it gets you into your dream home, so it’s worth it.

 What are closing costs? Well, it turns out a lot of things get rolled up into that term. Here are some of the things that make up closing costs.

Private Mortgage Insurance

Let’s say you’re getting a conventional mortgage but don’t have enough cash to cover 20% of the purchase price as a down payment. That’s okay, but it means you’ll need to pay private mortgage insurance or PMI.

 This is a fee tacked onto your mortgage to help protect the lender from loss. Since they’re lending you such a large part of the home’s purchase price, they want to make sure they get their money back. PMI is how they do that.

 The typical cost of PMI is 0.5% to 2% of the loan value each year.

Title Insurance and Services

The title of the house doesn’t just magically appear in your name. A title company has to put some work into it, so you’re paying for those services. You’re also paying for the title insurance that exists to protect you from financial loss.

Mortgage Points due at Closing

When you’re getting qualified for a mortgage, your lender may offer the chance to “buy points” in exchange for a lower interest rate. If you choose to do so, you’ll pay for those points upfront at closing.

Closing Costs and Loan Origination Fees

Up until the point of closing, your lender has put in a lot of work without getting any money for it. For example, they put in the work to pre-qualify you for the mortgage. Then once you get on contract with a seller, they spend a lot of time underwriting your loan, preparing the documents for you to sign, reviewing everything to ensure it’s correct, etc.

 The loan origination fees due at closing are how lenders get reimbursed for their time.

Homeowners Insurance is Due at Closing

Heaven forbid you to get into a home and have a major issue a month later without any form of insurance. To prevent that from happening, homeowners insurance is usually due at closing.

Property Taxes

This is similar to the homeowners’ insurance. It’d be bad news if you got into a home, then find out a month later that you’re behind on your property taxes. That’s why it’s common for at least 6 months of property taxes to be paid at closing. This makes sure you’re in good graces with the local government from the get-go.

Attorney Fees

It’s common for an attorney to help process the closing. Some states require an attorney. Some don’t. But the point is, if you have an attorney, expect a fee for their services.

Appraisal Fees

Remember how your lender had the property appraised? That was to make sure it’s worth at least the amount of the purchase price. They don’t want to lend you more money than the home is worth.

 When you close on the house, you’ll have appraisal fees to reimburse the lender.

To learn more about the mortgage process and the investment required, click here to find an Art of Homeownership professional near you and get access to the best advice and education in the industry!