Definition: Costs assessed at settlement that include a loan origination fee, points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs. The closing costs are usually around 2 percent to 6 percent of the mortgage amount.
Settlement costs, also known as closing costs, are a large expense of buying a home. Settlement costs are paid at closing, the meeting that legally transfers ownership of a home to the new owners. Settlement costs are paid with a cashier’s check that also includes your down payment. The lender lets you know this amount in advance through a good faith estimate.
One part of the settlement costs is points, which do not apply to everyone. You have to decide in advance if you are going to purchase points. Points are one percent of the loan, and are basically paying interest up front. If you have a loan for $180,000 and purchase two points, you have to pay $3,600 for the points at closing. Each point purchased brings down the interest rate a quarter point.
There are several other expenses that are a part of the closing that are paid with the settlement costs. For example, the appraisal fee, attorney fee, credit report, survey, title charges etc. are all paid for with the settlement costs. The settlement statement itemizes all of the costs and fees so it is clear exactly where the money for the settlement costs is going.
At closing, you present a single cashier’s check that covers not only the down payment, but also the settlement costs. The good faith estimate that the lender provides to you prior to closing lets you know exactly how much that total amount will be for the cashier’s check. After signing all of the documents at closing, you present the check for the settlement costs and, in return, you receive the keys to your new home.