Of all the steps in the home-buying process, closing is the one that often leads to the most questions. Rest assured that I will take the time to guide you to a better understanding of how closing on your mortgage will work.
How the Home Loan Closing Process Works
Closing day is an exciting time because it’s the day you will finally see your dream of homeownership realized. It can also be a hectic time since there are a lot of details to manage. Below is a summary of how the home loan closing process works.
Closing Costs
Although they tend to vary by lender, closing costs range from 2% to 7% of the home’s purchase price, and include three basic categories:
- Prepaid Expenses
Prepaid expenses include homeowner’s insurance, mortgage insurance and the costs to set up an escrow account. An escrow account is when a lender will pay the annual insurance premiums and various taxes on the borrower’s behalf. The amount that goes into this account is based on the first year’s premiums, an additional amount also is included to pay for future premiums. Because they vary based on the type of property and the time of the closing, prepaid expenses are difficult to determine. - Discount Points
A discount point is equal to 1% of the mortgage loan amount and actually helps reduce the loan’s interest rate. For example, depending on prevailing rates, a $100,000 mortgage might be obtained at 7.75% with 2 points, or at 8.25% with no points. Obtaining the lower interest rate would cut the mortgage payment by about $35 a month, but would require $2,000 — or 2 points — up front at closing. - Out-of-Pocket Expenses
Fees for appraisals, attorneys, credit reports, deed recording, tax services, home inspections and other miscellaneous expenses make up the out-of-pocket expenses.
Closing Day
Whether you are purchasing or refinancing a home, closing day can be a whirlwind. Everything moves fast and there are a lot of papers to sign. It’s a good idea to review what will happen ahead of time, so you can feel prepared and close your loan with confidence.
Who Will Be at the Closing Table
The number of people who will attend your closing depends on many factors, including the state where the property is located, the property type and more. At the closing, in addition to you, the people attending may include:
- Your attorney (if you have one)
- The seller(s) (if you are buying a home)
- The seller’s attorney (if they have one)
- Both real estate professionals (yours and the seller’s, if you are buying a home)
- The builder’s representative (if a brand-new home is involved)
- The closing agent (which could be a representative from the title company or a real estate attorney)
- A notary public
Steps in the Closing Process
The closing can be held at the title company’s office, your lender’s office, a real estate attorney’s office or other agreed upon location, depending on the circumstances.
Here’s a review of what will happen at closing:
- You’ll review and sign all of your loan documents. Make sure that each document is explained clearly and that you understand the terms to which you are agreeing. If something is different than what you expected or agreed to, don’t sign until the issue is resolved to your satisfaction.
- You’ll give a certified, wired or cashier’s check to cover your down payment (if applicable), closing costs, prepaid interest, taxes and insurance.
- Your lender will distribute (wire) the funds covering your home loan amount to the closing agent.
- Depending on your loan terms, you may also be required to set up a new escrow (or impound) account with your lender, so you can pay your property taxes and homeowners insurance along with your monthly mortgage payment.
Closing Paperwork
The main focus at a closing is to sign the final paperwork. The three main items to review and/or sign during closing are:
- Closing Disclosure Form
The itemized list of the final credits and charges, for both you and the seller, based on the terms of the contract. You should receive a copy of the Closing Disclosure Form at least three day prior to the closing for your review. - Deed of Trust or Mortgage
The documents in which you agree to a lien on your property, as security for repayment of your home loan. - Closing Paperwork
The mortgage promissory note is a legal “IOU” that represents your promise to pay the lender according to the agreed terms, including the dates on which you must make your mortgage payments and where they must be sent.
What to Bring to Closing
- A cashier’s check made out to the title company to cover closing costs. The title company will accept wired funds as well. Cash, personal checks or credit cards won’t be accepted.
- Government-issued identification card with photo for the notary.
If you are uncertain about what to do at any point of the loan process, contact me for guidance or to answer any questions.