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Buying or selling a house is an exciting and sometimes confusing experience that includes expenses called closing costs that can often catch people by surprise. Closing costs are simply the fees and expenses incurred by buyers and sellers during a real estate transaction closing or settlement process.
Typical closing costs can vary depending on what is customary in the area, the mortgage type, property value and other factors. The largest expenses can be the real estate agents’ commission and the title policy. Total closing costs for a buyer can characteristically range from 2% to 5% of the sales price and 4% to 7% for a seller.
The most common closing costs for buyers include a loan origination fee, title insurance, attorney fees, appraisal, homeowners insurance, underwriting, miscellaneous fees associated with a new mortgage and prepaid interest.
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Interest is paid in arrears on mortgages after the borrower has used the money. The payment due on the first of the month pays the interest for the previous month and is calculated for a full month. The prepaid interest covers the time from the closing date to the end of that month. The borrower’s first payment will usually not be the first of the month following the closing date but the next one.
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Separate from the closing costs, lenders usually itemize the additional fees collected at closing used to prepay portions of property taxes and insurance to establish the escrow account. Insurance is always purchased annually in advance, which would be due at closing.
The seller will owe taxes from Jan. 1 to the closing date, and it will generally show as a credit to the buyer if they haven’t been paid to the taxing authority for the year yet. Lenders generally like to have two months of funds for the taxes, along with the costs for an annual insurance policy, so the taxes can be paid and the insurance can be renewed before it is due.
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Some expenses are paid before the closing, like the inspection and appraisal fees.
While both buyers and sellers are responsible for paying certain closing costs, it is possible for a buyer to negotiate with a seller to pay part or all of their closing costs. VA loans restrict the buyer from paying certain fees and they become the responsibility of the seller. Such fees include attorney fees, agent fees, escrow fees to establish the account, rate lock fees, appraisal fees or inspections ordered by the lender.
The actual expenses will be determined by the lender and special provisions in the sales contract. Your agent can supply you with an estimate of closing costs you typically will be responsible for at the beginning of the transaction and again at the time the sales contract is written. Buyers will receive an estimate from their lender at the time of application.
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