Closing Costs

Money Crashers

Buying a home can be a wonderful experience. But, it’s best not to spoil that experience with unexpected closing costs.

What are closing costs? Basically, these costs are expenses incurred when you buy or sell a home. Here is a definitive list of closing costs every first-time home buyer needs to be aware of before taking the plunge.

Calculate Closing Costs

On the day you close or a few days before, you will be given several documents to sign. Among these documents is your roadmap to closing costs: the closing disclosure statement. This statement outlines all of the expenses–and who pays for them–involved in the home sale.

This document will contain your full down payment, loan origination fees, the cost of home inspections/appraisals, deed recording, notary fees, private mortgage insurance premium if your lender requires it, and prorations.

What are prorations, you may wonder?

Seller Vs. Buyer Prorated Expenses

Prorations are a two-way street. For instance, if the home seller has paid property taxes or even filled up the propane tank a few weeks before you purchase the home, you owe the seller prorations and you need to pay back the seller for the money they put into the home. Homeowner association fees also fall into prorated expenses.

On the other hand, home buyers may be owed prorations in some scenarios. For example, if the electric company sends a new homeowner a bill for the previous month, and the seller had occupied the house during that previous month, the seller would then owe the home buyer the difference for the energy they used. The closing cost statement should outline the specific number of days each person was the owner of the home.

Up Front Property Taxes And Insurance

Often times, lenders collect money for taxes and insurance with the mortgage payment and use it to pay those bills for you. This is an act where lenders are protecting their investment. If a new homeowner does not buy home insurance, the home could be damaged or burn down and be worth less than what the new homeowner owes to the lender.

These closing costs can even vary depending on where you live, as you’ll see next.

Closing Costs By Location

In about 20 states, a lawyer is required to close on a real estate transaction. Even if your state does not require a lawyer to handle the transaction, you may choose to do so anyway. Either way, this will bump up your closing costs even more. Fun fact: In California, real estate closings are handled through escrow companies usually chosen by the seller.

Some Closing Costs Can Be Negotiable, But Not Many Of Them

Some fees have wiggle room. Others do not. For instance, the fee for a title search is mandatory and you definitely want to know if the home you are buying has a clear title. No wiggle room with taxes, either. However, you may find mortgage origination fees that are less expensive if you shop around for a mortgage. Closing at the end of the month will also help you pay less loan interest, as they are billed per diem.

Happy home buying!