The term “closing costs” is thrown around a lot during the home buying process, but it’s important to be prepared for what these costs might entail. A home buyer doesn’t want to be caught off-guard by the amount of money owed above and beyond the property price when a sale culminates.
The process during which the final real estate contract is executed and the property title is transferred into the hands of the buyer is known as the “closing.” Beyond the title transfer and close of the contract, there are fees and expenses associated with the transaction that may be owed by the buyer, the seller, or both parties. Each closing is unique, but here are a few examples of costs that might be incurred at the time of the closing:
- Brokerage commissions. These are fees that are usually paid by the seller to a real estate broker for marketing the property, locating a buyer, and negotiating the sale.
- Attorney, closing, or escrow fee. These fees, which can be paid by the buyer, the seller, or both parties, are in exchange for the preparation of documents.
- Title exam and/or insurance. The title exam researches property records to ensure that no one else has a claim to the property; similarly, title insurance ensures that the title to the property is valid.
- Recording fees. These can be paid by either party to the municipality responsible for land records and are incurred for creating an official record of the property’s change of hands.
- Discount points. “Points” are a type of pre-paid interest – paid in exchange for a lower interest rate on the mortgage. One point is equivalent to one percent of the loan principal. This sum can lower the monthly payment for the duration of the loan.
- Mortgage application fees. While these are often paid to the lender up front by the buyer, they are sometimes folded into the closing costs.
- Credit report. The buyer pays the lender to run this report, which determines eligibility for the loan itself as well as interest rates.
- Inspection and appraisal. Usually paid by the buyer, both a professional appraisal and licensed inspection of the property are usually required by the lender as a condition of extending the loan. An appraisal verifies the value of the property, while an inspection ensures the property to be in acceptable condition.
- Lender fees (such as underwriting or processing). Paid to the lender by the buyer, both of these fees cover the cost of researching and approving the loan.
- Document or transaction taxes or stamps. A legally required excise tax on the transaction, this type of fee may be paid by either the buyer or the seller, depending on location. The lender and title company do not require this fee, it is only by request of the borrower.
There are other types of fees that can be rolled into closing costs depending on the nature of a buyer’s agreement with the lender – depending on the property and its location, you may expect to pay expenses for anything from flood determination to home owners association transfer fees. Closing costs also vary according to where you live. It’s best to speak to your real estate agent and mortgage broker up front to find out exactly what types of costs you can expect to incur so that you don’t encounter any surprises when you finally seal the deal.