If you are a first- time home buyer, you may hear people refer toclosing costs. Simply put, the finalizing of a real estate transaction is called the closing, and any costs associated with that closing, on the part of the buyer or seller, is referred to as closing costs. Typically, closing costs can range anywhere from 2 to 5 percent, and these percentages are referred to as points.
Closing costs aren’t a single charge but, rather, many charges that are added to any real estate transaction by the bank or mortgage company, the closing attorney and other third parties. The good news is there should be no surprises. All closing costs must be listed on your settlement form, and you should ask for and receive a “good faith estimate” of closing costs prior to getting to the table.
- Credit report fees. The mortgage company will check your credit before issuing a loan, and there may or may not be a fee associated.
- Origination fee. This somewhat vague term covers the paperwork and labor incurred by the lender to process the mortgage.
- Attorney fees. There might be a single closing attorney, or both parties may elect to have their own representation. In either case, there are fees associated.
- Inspection fees. The buyer and/or the mortgage company may demand an inspection of the property, and this fee is usually included in closing costs.
- Recording fees. This covers any fees charged by city, county or state governments for any filings and recording of the transfer of the deed.
- Discount points. In many instances, you may be able to pay a percentage of the cost of the home to reduce the interest rate.
- Survey fees. Most lenders will require a survey to confirm the property size and property borders.
- Appraisal fee. Before a lender will issue a loan on a property, they will want to be sure of the value of the home.
- Brokerage or real estate agent commission. The commission, usually a percentage of the cost, paid to the agent(s) and brokerage house responsible for making the sale.
- Title search. A fee paid for performing a background check to make sure the mortgage is clean, with no liens or other unpaid bills associated with the property.
- Title insurance. A policy to protect the lender in case the search doesn’t find something.
- Home warranty. Warranties are available on new homes to protect the buyer against major problems during the first year. This is often paid for by the seller as an added incentive.
- Escrow deposit. This is extra money rolled into the loan to cover things like property taxes and insurance that the lender may be asked to pay as part of the mortgage.
- Pro-rated taxes, insurance and fees. This can cover anything that is owed by either party due to the closing being made in the middle of the month or year. For instance, the seller might already have paid property taxes for the year, and now the buyer is responsible for a portion of that.
- Termite inspection. Many states require homes be inspected for termites or other destructive pests before a home can be sold.
These are most of the things you are likely to see on a closing document, but there may be others. Always demand a good-faith estimate as early as possible so you can prepare for the fees and attempt to negotiate what you are able. Also, carefully go over each line item at the closing table to make sure there is nothing unexpected or out of line. In addition, make sure the closing costs are being charged to the correct party, as many of these costs can be paid by the buyer or the seller or both.
Closing costs are a necessary evil when it comes to buying a home, but a little research and preparation will leave you ready to close on your new home without surprises.