Closing costs are those costs associated with the purchase of a home or investment property. They are paid "at the closing of escrow". For the typical home buyer who is purchasing a home to live in, the majority of the closing costs are usually related to the loan. These costs may vary from one lender to another. The loan origination fee is one common example. This is simply the lender's commission. It's how your loan originator gets paid for getting you qualified for your loan. The origination fee is commonly in the range of 3% of the loan amount. And if you are using "low down payment" loans, such as FHA, you'll also be required to pay for Private Mortgage Insurance.
The most common closing costs that most any buyer should plan for are the appraisal fee, attorney or title company fee, and "pre-paids" such as insurance and property taxes. Buyers usually have to bring a valid insurance policy or binder to closing, showing that they have paid the insurance on the property for the first year. So this is a closing cost, but it has been paid prior to closing, thus the term "pre-paid". Appraisals are often paid for prior to closing as well, but sometimes are paid at closing. While your first mortgage payment may not be due for a month, there may be an interest payment required at closing as well.
Property taxes are pro-rated to the closing date. The seller pays their share of taxes for the number of days they owned the property, the buyer pays the taxes for the remainder of the current year. The lender will usually require the buyer to pay several months worth of taxes and insurance into an "escrow" account, to be held towards the taxes and insurance for the next year. Taxes and insurance are usually included as a portion of the mortgage payment. Then when the property tax or insurance bill arrive the following year, the mortgage company pays them out of the buyers escrow account.
While preparing for the closing of escrow, documents will often be sent back and forth between the lender and attorney. This will generate courier fees, another item commonly found on your settlement statement.
The settlement statement, also known in the U.S. as a HUD-1, is a form prepared by the attorney or title company that lists all of the financial details of the transaction. It will show the purchase price, down payment, taxes, insurance, courier fees, attorney fees, agent commissions if any, (usually paid by the seller) along with any number of other items related to the specific transaction. It looks somewhat like a balance sheet, with a side for the buyers payments and a side for the sellers costs and money received.
In a typical closing, the attorney or title agent is representing the lender. You may want to bring your own attorney if you are not represented by a real estate agent. Otherwise, you and your agent should review the settlement statement carefully to insure that it is correct before you sign any documents at the closing.
Often the total amount of closing costs is higher than was originally anticipated by the buyer, so it's a good idea to plan to have extra funds on hand just in case.
Usually, a certain amount of closing funds must be brought to the closing as "certified funds". If you bring less than the required amount, the closing will be delayed or halted altogether. The closing attorney will only accept payments that meet the criteria given them by the lender.
The exact amount of closing funds is often not finalized until the day before or the day of the closing. Don't be surprised if the total you are given ahead of time changes by the day of the actual closing of escrow. It pays to stay on top of what is happening as you approach the closing date.
Costs associated with a typical closing are negotiable between the buyer and seller at the time you sign the contract. You could ask the seller to pay 100% of the closing costs, and if you can get them to do that, you may only need whatever down payment, if any, that you are required to pay by the lender.
If you are fortunate enough to obtain seller financing, or you are buying with cash, and not getting a new mortgage, you could potentially eliminate expensive loan fees, mortgage insurance fees, and other fees usually required by mortgage lenders.
"Title Charges" are associated with the work done to check on and insure a clear title. Title insurance is a "must have". (The lender may require that you purchase title insurance for them, as part of your closing costs, but this will not cover you in the event that the title is found to be defective later on). It's worth it to purchase a buyers title policy as well, to protect you in the event that there is ever a dispute over the title to the property.
Every transaction is different. Buyers should make sure they keep tabs on the closing costs as the transaction progresses toward the closing day. Then check the settlement statement carefully and don't be afraid to ask questions if you don't understand an item on the statement.
Donna Robinson is a staff writer for Realty Biz News. Her real estate background spans 16 years, from being a licensed agent to an active real estate investor and investing consultant. She also offers coaching and consulting services. Get a free PDF copy of her latest book, "The Fundamentals Of Buying And Selling Homes" by contacting her at [email protected]