Define Closing Costs
Buying a home can be exciting, and although an average of 3 million homes are sold in the United States each year, the transaction certainly isn't simple or inexpensive. If you're thinking of purchasing a home, you've probably wondered what other costs are involved. Here's an explanation of closing costs, along with the information you'll need to navigate them.
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Closing Costs Defined
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Closing costs, sometimes referred to as settlement costs or closing escrow, are fees and expenses that are over and above the cost of the home. These costs can vary, but they typically fall in the range of 2 percent to 8 percent of the price of the home. Typical costs include deed-recording fees, taxes, appraisal fees, commissions, deed preparation and preparation of the closing documents. Other costs can include pro-rated homeowner's association dues, prepayment penalties, and monies to fund the escrow account, if applicable.
Responsibility
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The purchaser is typically responsible for the closing costs. You'll want to ensure that you maintain a list of costs you expect to be assessed, such as owner's title insurance, lender's title insurance, and lender-required policy endorsements, and compare those against the good faith estimate. If there are discrepancies in the amounts, you should clear them up with your real estate agent before you sign any documents.
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Good Faith Estimate
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The good faith estimate is a federally mandated disclosure that will be provided to you at some point during the closing process. This is intended to provide an accurate assessment of any extra fees associated with the purchase. With the down payment included, the figure on the good faith estimate can be quite a scary figure. With a loan of $100,000, not including the down payment, this figure is typically between $2,000 and $8,000.
Options
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It's quite possible that the down payment alone has left you strapped for cash. If you can't bring the cash to the table, you can ask for a seller's concession. In this situation, the purchaser and the seller make an agreement. The agreement states that the purchaser will originate a loan for an amount greater than the sale price. So on a $100,000 mortgage with a 6 percent seller's concession, the purchaser will obtain a loan from the lender for $106,000. The seller then returns $6,000 to the purchaser to cover the closing costs.
Misconceptions
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The costs associated with closing the purchase of your new home don't all go to the lender. Some go to third-party services that perform various functions. For example, title insurance is a highly recommended, to ensure the integrity of the title. An appraisal must also be purchased so that all involved parties are fully aware of the value of the home. However, the value of the home can differ from the actual cost.
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References
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