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Mortgage Loans 101: How to Prepare for Closing Costs

Written by: Brandon Cornett

Most home buyers understand the basics of home mortgage loans. They know what a mortgage loan is, how interest works, and other fundamentals of the home loan process.

But when it comes to the closing costs associated with buying a home, many of these same home buyers get caught off guard - by both the variety and total amount of closing costs. By understanding and preparing for these costs ahead of time, you can avoid such surprises.

What Are Closing Costs?

Closing costs are the total cost of completing the transfer of ownership of a house. These costs do not include the purchase price of the home. Rather, they are the extras -- fees and expenses aside from the purchase price.

On average, closing costs range between 3% and 5% of the total loan amount. So for a loan of $200,000, closing costs might run $6,000 to $10,000 (3% and 5% respectively of $200,000).

What's Included Within Closing Costs?

Closing costs vary depending on where you live and what mortgage lender you choose. But closing costs often include fees for the following (this list is not all-inclusive):

* Loan origination

* Loan application

* Appraisal

* Document preparation

* Attorney's services

* Escrow agent's services

* Pest inspection

* Credit report / processing

Getting an Estimate of Closing Costs

The Real Estate Settlement Procedures Act, or RESPA, requires that mortgage lenders give you a good faith estimate of all the loan-related fees you're likely to pay at closing. They must give you this estimate at the time of loan application. Keep in mind, however, that these are just estimates. Actual closing costs may be more than the good faith estimate closing costs.

Shop Around

It's a good idea to obtain good faith estimates from multiple lenders. Don't choose a lender based on their interest rates alone. Shop around for estimated closing costs as well.

Just realize that large discrepancies between estimated and actual closing costs are not uncommon. You can prepare yourself for this by having enough money in the bank to cover the good faith estimate amount and then some.

A few days before closing, you will receive another document called a settlement statement, or "HUD-1 statement." This document will give you a more exact tally of the closing costs you'll be expected to pay at closing.


Closing costs include a wide variety of fees and charges. They can add up to a sizable amount, so it's important to prepare for them in advance. Be sure to factor closing costs into the equation when looking for a mortgage lender. Proper planning can help you avoid unpleasant surprises on closing day.

* Copyright 2006, Brandon Cornett. You may republish this article in its entirety, provided you leave the byline, author's note and website hyperlink intact.

About the author:

About the Author

Brandon Cornett is the editor of HomeBuyingInstitute.com, one of the Internet's largest libraries of home buying information -- over 100 expert articles on home buying and home mortgage loans! Learn more at: http://www.homebuyingin stitute.com

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