Finalizing a home purchase and taking up a mortgage loan comes along with a certain amount of closing costs. These costs or fees are associated with the settlement of the deal and include a number of small charges that have to be paid by the home buyer. Only in rare scenarios will the seller of the house also be required to pay these costs along with the buyer.

Closing costs are those which cover various elements that accompany the purchase and vary with each real estate transaction. In simple terms, a home buyer will be looking at paying a down payment, a principle amount with interest for the mortgage and closing costs which are paid to the lender or any third parties involved. These costs also include costs paid to the state or the local government. For example, closing costs in Westchester, NY may include city, county and state fees charged by the government.

When a home buyer applies for a home loan, the lender which may be the bank or any other third party is required to provide an estimated amount of the closing costs by law. The term used for this estimate is called a good faith estimate (GFE) which gives the home buyer an idea about what he or she is going to be paying when accepting the loan and the offer. The list of individual costs that are accumulated as closing costs is also provided to the buyer. These costs are generally paid with the mortgage price by the home buyer.

In a typical scenario, home buyers may be facing anything between 2 percent to 5 percent of the total purchase price when they finalize an agreement. Since the amount involved in such a transaction is a big one, even the slightest increase in percentage affects the financial situation of the purchaser. Upon receiving the GFE, the home buyer can go through the list of costs and negotiate on what should be charged and what should not be charged. Since the GFE is provided within three days of applying for a home loan, home buyers have plenty of time to decide whether they are interested in paying the stated closing costs or not since some are completely unnecessary in certain scenarios. They should always remember that they always have a choice of walking away from lenders and third parties who charge a high percentage of closing costs. Many other lenders would be interested in paying lesser in today’s competitive market.

Closing costs can be divided in three main categories which are briefed below:

Ownership Transfer Charges

As the name suggests, these charges cover everything related to the ownership and title of the property. Establishing and transferring ownership require costs including searching for the title, insuring the title, paying any relevant legal fees and concluding the settlement.
Establishing title ownership and searching the public records in order to determine that the seller has the claim to the property is the first step towards finalizing a deal. This process has a couple of costs associated with it which is why it is added to the closing costs category.

Moreover, costs associated with the lender’s title insurance formality is also a necessity in order to stay free from any uncovered disputes on the property’s title.

State and local government charges

State and local government charges have to be paid as closing costs as well. These usually include transfer taxes charges by the city, county and state, recordation fee and prepaid property taxes. Taking the closing costs in Westchester example again, buyers need to go through all the formalities required by the government in NY and determine the taxes and costs associated with it.

Mortgage Costs

There are various costs related to the mortgage process. These may include property survey, credit checks, documentation and preparation fees, notary charges, loan origination, mortgage insurance, commitment and processing fee, prepayments, lender’s inspection fee, etc.

Loan origination fee is the costs incurred to evaluating and processing the mortgage loan for the home buyer. This fee has been included as a percentage of the loan amount and is paid with the closing costs.

Appraisal fee, as the name suggests, is a cost that is incurred to appraising the home for the buyer. The amount charged is dependent on the kind of property the buyer is interested in.

The time of settlement matters when determining the closing costs since the internet payment is dependent on it and it is usually paid in arrears. In order to reduce the closing cost, buyers may want to take into account the date they are looking at to formalize their purchase.

In certain scenarios, fee paid for an escrow account by a third party to hold money may also add up to the closing cost. This fee is normally due with the rest of the closing costs since the account is set up to pay property taxes and insurance.

Finally, any other third party fee may also add up to the mortgage costs and eventually the closing costs which may include documentation preparation fee and underwriting fee, putting the home buyer in a very sensitive position when taking up a loan on a home purchase transaction.

The lists below include typical closing costs for many situations but not necessarily for your specific closing. Always ask your attorney and/or lender for a list of all closing costs.