When experienced buyers look at mortgage rates they’re likely to pop the question right after they see the promotional numbers. No, they’re not going to get engaged—they’re going to ask, “so what are the closing costs?”
Closing costs are fees that all borrowers have to pay to “close” on the purchase of a home, and the mortgage for a home. This list of fees, charges, and other expenses, which are collectively grouped as “closing costs” can often make the difference between a loan that makes sense, and a loan that doesn’t make all that much sense.
Some of the largest expenditures for closing costs come from securing ownership of a property. These two items are:
1. Title Insurance – Title insurance is a product that everyone should buy, even though most people will never need it. To put it simply, title insurance protects you from the very small possibility that you do not actually own the home and the land that your title says you own. While these claims are rare, some title insurance claims did come due during the housing boom, with banks misplacing key information in the title to mortgage deeds and property.
2. Title Search – A title search is a preliminary search of local laws, titles, and claims to real estate ownership. This charge may vary by location, as some cities make a business of looking up titles for soon-to-be homeowners and refinancers.
Next on the list of closing costs are those which vary greatly from property to property, and from deal to deal. These include:
1. Attorney and Escrow – Attorney fees are higher for loans that are not “plain-vanilla.” If you need a loan contract that is not a common request for homebuyers, then you’ll have to pay for a lawyer to sculpt the contract. Escrow is a small fee usually intended to serve as a guarantee for any money that changes hands between buyer, seller, and bank.
2. Inspection, Appraisal, and Doc Fees – Home inspection fees are those that are paid to cover the cost of inspecting the home for termites, structural damage, or building code violations which may render the home unsafe, of poor quality, or even worse, unlivable. Appraisal fees are those which you pay for a state licensed appraiser to assign a market value to the home. And finally, “doc” fees, or documentation fees, are intended to cover the cost of getting all the paperwork together between the many people who may evaluate the quality of the home, the value of the home, or both.
Avoiding Closing Costs
When buyers and sellers meet for a new home purchase, or when homeowners go to refinance a bank loan, they often search out methods for avoiding closing costs altogether, or for making the other party pay for the closing costs.
Since refinancing a mortgage is a very competitive business, you may have very good luck in convincing a lender that they should pay the closing costs for you. This is especially true if, on the off chance, a lender decides that it will provide a refinancing for its own loan. While rare, banks do have an incentive to offer refinancing to current borrowers as they’re sure to lose the profitable loan if the refinance goes to another company.
Alternatively, closing costs can be paid-for by both the buyer and seller in any contract where the sale of real estate is made. First time homebuyers often request of sellers that they pay the cost of closing, since the first time homebuyer is unlikely to have any spare cash to foot the bill. Closing costs are also sometimes borne by the buyer, who may choose to bid low on a home listed for sale but with the offer to pay closing costs. This method of negotiation is especially strong if you know the other party is unlikely to be able to come up with sufficient cash from non-loan proceeds to pay closing costs.