Understanding Closing Costs
The term ‘Closing Costs’ is a commonly used phrase that describes a combination of fees associated with the purchase and sale of a home. These fees are paid at the time of closing. Closing is the point in time when both parties sign the final papers and the title of the home is transferred from the seller to the buyer. Closing costs are comprised of both prepaid items (i.e. homeowner’s insurance, tax, and mortgage interest) and service fees (i.e. title, escrow, and lender fees). A buyer and seller may negotiate their portion of closing costs prior to signing a purchase agreement. In addition to the down payment, buyers should plan to provide their portion of closing costs at closing. Sellers should recognize that proceeds from the sale will be reduced by their portion of the closing costs.
Closing costs can vary greatly depending on the location of the property and the type of loan a buyer chooses. The following list includes fees and services that commonly contribute to closing costs.
Lender Fees. If a home buyer is financing a home purchase, a mortgage company will be involved in the process. These lending entities provide loans to qualified buyers and charge a fee for processing and funding the loan. Total lender fees depend upon the loan a buyer chooses. The fees may include application fees, loan origination fees, underwriting fees and more.
Title Fees. A title company will conduct a title search to make sure the seller has legal possession of the home. A title search will also reveal whether any liens, judgments, unpaid taxes, easement disagreements, restrictions or leases, affect the property.
Lender’s Title Insurance. Lender’s Title Insurance protects a lender should a title search reveal concerns to the title of a property. Title insurance is typically required by the lender to fund a mortgage loan.
Owner’s Title Insurance. Owner’s title insurance provides protection to the homeowner against concerns to the title to the property. Owner’s title insurance is optional.
Prepaid Items. Prepaid items include prepaid property taxes, homeowner’s insurance, and mortgage interest that will accrue between the closing date and a future due date.
Recording Fee. A recording fee is a fee charged by a government agency for registering or recording a real estate purchase, creating a recorded record of the transaction.
Transfer Taxes. A transfer tax may be imposed on the transfer of title. Many states do not have a transfer tax. Of those that do, the amount varies depending on state and local regulations.
Closing Fee or Escrow Fee. These fees may be collected by the title company, escrow company, and/or an attorney as a fee for conducting the closing. The escrow company manages the closing by assisting with document collection, signing, oversight, and the distribution of funds.
Buyers and sellers should prepare to provide their portion of the closing costs at closing. Prior to closing, an escrow agent should provide the buyer and seller with a settlement statement, detailing the closing costs due. Be sure to review the settlement statement and contact the escrow agent with any questions or concerns.
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