Explanation of Closing Costs

Buying a home involves time, energy, and most of all money. In addition to committing yourself to mortgage payments for 10 to 30 years, you need quite a bit of money "up front" to close the transaction that will make the house yours. There are several types of closing (or settlement) costs and other up-front costs you should be prepared to pay.

Financial closing costs are paid by both the buyer and the seller. In some areas, custom or tradition calls for the seller to pay for certain expenses and the buyer to pay for others. One way to minimize closing expenses is to negotiate some of them as part of the purchase offer. Some fees are set by law, and therefore are not negotiable. Others are set by the local real estate, financial markets, and may be more flexible.

What Happens at Closing

Much of the paperwork involved in closing (or settlement) is done by attorneys and real estate professionals. You may be involved in some of the closing activities and not in others, depending on local customs and on the professionals with whom you are working.

Before you close on your property, you should have a final inspection, or walk-through, to make sure any repairs you requested have been made and that items which were to remain with the house (drapes, light fixtures) are still there.

At the closing, ownership officially is transferred from the seller to you. It may involve you, the seller, the real estate agent, your attorney, the lender's attorney, representatives from the title or escrow firm, and a variety of clerks, secretaries, and other staff. It is possible to have an attorney act on your behalf if you cannot attend the closing (for example, if the house is in another state). Closing can take as little as an hour or it can take several hours, depending on the contingency clauses in the purchase offer (and any escrow accounts that may need to be set up).

In some states, settlement is done by a title or escrow firm to which you forward all the materials and information along with the appropriate cashiers' checks, and the firm will make the necessary disbursements. The closing attorney, real estate agent or a representative of the title company will deliver the check to the seller and the house keys to you.

Statutory Costs

Statutory costs are expenses you would have to pay to state and local agencies even if you paid cash for the house and did not need to take out a mortgage. They include the following:

Transfer taxes are required by some localities to transfer the title and deed from the seller to you.

Recording fees for deed pay for the county clerk to record the deed and mortgage and change the property tax billing.

Other state and local fees, which can include mortgage taxes levied by states as well as other local fees.

Prorated taxes such as school and municipal taxes may have to be split between you and the seller because they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2 months while the seller would owe taxes for the other 10 months. Prorated taxes usually are paid based on the number of days (not months) of ownership. Some lenders may require you to set up an escrow account to cover these bills. If your lender does not require an escrow account, you may want to set up a