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What are closing costs?

My husband and I are trying to buy our first home. We have saved for a down payment but our real estate agent mentioned closing costs. What are closing costs? Does everyone pay them?

ANSWER:

Closing costs are the fees for services, taxes and other charges that relate to the purchase of a home. They sometimes include up-front loan points, prepaid interest, title insurance, escrow, document fees and property taxes. Unless you are participating in a special "first time home buyer" program, and/or unless some of these charges are rolled into a loan, they must be paid when the home is closed.

Closing costs are usually between two to four percent of the total price of the home. Some of this variation has to do with the time of year you close on the property in relation to when property taxes are due. Title insurance rates are standard and are based upon the selling price of the home and the amount of the mortgage.

There are a few things that can be done to reduce some of these costs. You could:

Negotiate with the seller to pay all or part of the closing costs. The lender usually must agree to this as well as the seller.

Investigate homes that indicate that the seller will finance the sale. This eliminates loan fees but may increase some legal expenses.

Try to find a no-point or no-fees loan. If you are short on cash and can qualify for a no-point loan at a higher interest rate, you will significantly cut your closing costs. The trade-offs are the higher interest rate and the prepayment penalties that come with many of these loans.

Shop for the best loan deal. Banks and mortgage companies have a variety of fees and costs.

Consider renting with an option to buy the house you want. Many lease-option agreements specify that a portion of the rent is applied toward the purchase if the option is exercised. This is referred to as rent credit. Institutional lenders usually accept rent credits as part of the down payment if rental payments exceed the market rent and if a valid lease-option or lease-purchase agreement is in effect.

There are many ways to reduce some closing costs but don’t wait until the last minute to estimate these costs or explore the options because closing costs could add up to a surprising total.

This information is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.

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