What Are Closing Costs?
Closing costs are fees paid at the closing of a real estate transaction in addition to the property’s purchase price.
Closing costs are processing fees you pay to your lender. It is an additional fee you pay alongside the down payment, usually during the closing meeting. Closing costs are often between 3% and 6% of the home price and may be negotiable. Also, closing costs vary depending on the lender and the loan program you decide to use.
There are two types of closing costs; Buyer’s closing costs and Seller’s closing costs. Each party pays the closing costs unless there are some arrangements in a contract where one party pays the other’s closing costs, and the lender permits it. But in a situation whereby each party is responsible for the closing costs, the buyer is expected to pay the lion’s share of the closing costs since most of the fees are associated with the loan.
If you are the buyer, you will see your closing costs listed in your closing documents. In it, you will see fees which include:
- Application fees: The amount the lender charges to set up the loan. There is no refund even if you don’t end up being a good fit for the house.
- Tax service fee: It depends on your location. If you stay in a state where the tax rate is high, your tax service fee will also be increased.
- Appraisal fee: It determines what the home and property are worth. That way, the lender knows how much to lend.
- Attorney fee: If you are hiring one, you need to pay the attorney to complete the paperwork for your title transfer.
- Escrow funds: This is established to pay your taxes and insurance on your behalf. It is helpful because you don’t have to come up with cash for the expenses.
- Courier fees: It covers the transport of mortgage documents.
- Miscellaneous fees: It covers inspection and survey of the house.
There are also other fees like prepaid items, prepaid insurance and registration of deed fees, etc.
Closing Costs Example
Benedict takes a $200,000 mortgage to finance the purchase of his dream home. The lender informs him that the closing cost is 5% of the actual home cost during the closing meeting. After negotiations, Benedict gets the fee down to 3.5% and pays $7,000.« Back to Glossary Index