Closing costs are simply the fees, costs and taxes associated with the purchasing of a home, the borrowing of money and the preparation of necessary paperwork to finalize the sale. The total amount of your closing costs will vary depending on where your new home will be located, what type of property you are buying, the price of the home and the complexity of the transaction. It is extremely important that you work closely with your Realtor and lender in the early stages of the home buying process to determine what these costs could be, since closing costs can easily represent thousands of dollars.
The main categories are:
1. Discounts Points to Buying Down the Mortgage
This fee is optional and can vary significantly from 0.5 to 3 points on the total of the mortgage. It is a one-time charge that is calculated based on the amount of the mortgage loan. A buyer would pay this amount up front to reduce the ongoing cost of the mortgage over the life of the loan. This charge is fully deductible as mortgage interest.
2. The Costs of Originating the Mortgage
These generally include a variety of fees such as the loan origination fee, the appraisal fee and the cost of credit reports. There are also other fees that you will be expected to pay at closing such as hazard and mortgage insurance and interest accrued on the mortgage between closing date and the end of the month.
3. Taxes and other Local Fees
These charges will vary according to the requirements of local governments. Some may demand that your property taxes be pro-rated according to when you will officially become the owner of the house. There can also be personal property taxes, homeowner's association dues, and other assessments that are specific to the area that you are moving into.
4. The Cost of Documentation
You will have to pay for any research involving public records and the title history on the property you are buying. This insures that the title on your property is unencumbered by other ownership or liens and can be delivered to you at closing. Other costs include Recording and Transfer fees that cover the legal recording of the deed to your name.
It is critical that you have a clear understanding of the total cost of your closing. Your real estate agent or the attorney/escrow company should supply you with a detailed estimate well in advance of the actual closing.