What are Closing Costs?

Closing costs are fees and expenses paid by both the buyer and the seller when a transaction is completed. Closing costs are common expenses in real estate transactions.

Closing Costs Examples

Closing costs are most commonly associated with real estate transactions. These costs can be 3% to 6% of the cost of a house. Common closing costs include loan application fees, points, prepaid homeowners' insurance, an appraisal fee, inspection fees, transfer taxes, escrow fees, attorney fees, recording fees, prepaid interest, prepaid private mortgage insurance, title insurance, and title search costs.

Other costs include the cost of obtaining a credit report, processing fees, courier fees, and paperwork preparation fees. Closing costs do not usually include the real estate agent's commission, moving costs, renovations, etc.

Closing costs vary by lender and service provider. However, the law requires lenders to give mortgagees what is called a 'good faith estimate' of the closing costs associated with a particular mortgage within three days of receiving the mortgage application.

Why Closing Costs Matter

It is important to remember that estimated costs are usually only the lender's best estimate -- the actual costs are often different. This discrepancy is due to the fact that the lender does not actually perform the inspection, provide the title insurance, or record the deed transfer itself -- the inspector, the title insurance company, and the county accomplish these tasks. Thus, it usually pays for the buyer to shop around and negotiate whenever possible.

It is also important to consider the closing costs as part of the total cost of a piece of real estate. For example, if you purchase a house for $100,000, you might have to pay $3,000 in closing costs, a 6% commission ($6,000) to the real estate agent, and $1,000 for repairs. Because the true cost of your house is $110,000, your $100,000 house needs to appreciate by $6,000 + $3,000 + $1,000 = $10,000 or 10% before you can consider yourself 'even.'

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Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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