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What home buyers need to know about closing costs

Closing costs are a combination of lender fees — such as origination, processing and tax service fees as well as third-party fees such as your appraisal, title insurance and closing — and fees charged by your state or county for recording fees or transfer taxes. (iStock)

Cash needs for a down payment are a big focus for many first-time buyers, but closing costs also require cash from buyers. We asked Shelby McDaniels, executive director of corporate home lending at JPMorgan Chase, to explain the ins and outs of closing costs for buyers.

Q. What are closing costs?

A. Closing costs are a combination of lender fees — such as origination, processing and tax service fees as well as third-party fees such as your appraisal, title insurance and closing — and fees charged by your state or county for recording fees or transfer taxes.

Q. What fees can you expect at closing?

A. In addition to the fees mentioned above, you’ll be making your down payment at the closing. You may also be paying for “rate discount points” to lower your mortgage rate. Lenders estimate third-party fees for you upfront but will not have those actual fees until they receive final fees from the title company. These fees are variable and subject to change. You will also be offered an owner’s title policy from the title company. The cost for the appraisal is set by a third-party appraisal management company and can vary depending on the property.

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You’ll also make prepayments, which are composed of prepaid interest from the date you close through the first of the following month and escrows, which are your homeowners insurance and property taxes. Homeowners insurance is paid for a full year in advance and then a few months are collected for your escrow account. Property taxes paid at closing are determined by the title company and depend on when taxes are due and if you are in a state where taxes are paid in arrears or ahead. If you’re establishing an escrow account, your lender will also collect money to make sure you have enough in your account for when your taxes and homeowners insurance payments are due.

Q. Who pays closing costs?

A. The buyer and the seller both pay some closing costs. Sometimes buyers can negotiate with the seller to pay some of their closing costs. In some cases, a buyer may be offered a loan with no closing costs, which generally means the closing costs are built into the interest rate. You’ll pay a slightly higher interest rate and the lender will cover some of your closing costs. When determining the amount of closing costs you should pay, you should always consider the amount of time you plan on being in the home. If you’re only planning on living in the home for a few years, it might make more sense to take a higher interest rate that covers your closing costs, as you will not recoup those costs in interest savings. However, if you plan on keeping the home for five years or more, it is generally best to pick the lower rate. Your lender can help you determine the best choice for you.

Q. What are some ways that buyers can lower their closing costs?

A. Besides negotiating with the seller and asking your lender about wrapping some closing costs into a higher rate, you should shop for title services, title insurance and homeowners insurance with multiple companies to compare their costs. Some buyers and properties are eligible for certain loan programs that give home buyers grants.

Q. Anything else that may help with paying closing costs?

A. Get quotes or work sheets from multiple lenders and evaluate the mortgage rate and fees. Check with your employer, state, city and even credit card company to see if they offer any home-buying incentives.

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