What it is:
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.
How it works (Example):
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. They usually do not 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 it Matters:
It is important to remember that estimated costs are usually only the lender's best guess -- 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 do. Thus, it usually pays to shop around and negotiate whenever possible.
And it is 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 and then 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."