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Closing Costs
The bundle of fees associated
with the buying or selling of a home are called closing costs.
Certain fees are automatically assigned to either the buyer
or the seller; other costs are either negotiable or dictated
by local custom.
Buyer closing costs
When a buyer applies for a loan, lenders are required to provide
them with a good-faith estimate of their closing costs. The
fees vary according to several factors, including the type
of loan they applied for and the terms of the purchase agreement.
Likewise, some of the closing costs, especially those associated
with the loan application, are actually paid in advance. Some
typical buyer closing costs include:
- The down payment
- Loan fees (points, application fee, credit report)
- Prepaid interest
- Inspection fees
- Appraisal
- Mortgage insurance
- Hazard insurance
- Title insurance
- Documentary stamps on the note
Seller closing costs
If the seller has not yet paid for the house in full, the
seller's most important closing cost is satisfying the remaining
balance of their loan. Before the date of closing, the escrow
officer will contact the seller's lender to verify the amount
needed to close out the loan. Then, along with any other fees,
the original loan will be paid for at the closing before the
seller receives any proceeds from the sale. Other seller closing
costs can include:
- Broker's commission
- Transfer taxes
- Documentary Stamps on the Deed
- Title insurance
- Property taxes (prorated)
Negotiating Closing Costs
In addition to the sales price, buyers and sellers frequently
include closing costs in their negotiations. This can be for
both major and minor fees. For example, if a buyer is particularly
nervous about the condition of the plumbing, the seller may
agree to pay for the house inspection.
Likewise, a buyer may
want to save on up-front expenditures, and so agree to pay
the seller's full asking price in return for the seller paying
all the allowable closing costs. There's no right or wrong
way to negotiate closing costs; just be sure all the terms
are written down on the purchase agreement.
Prorations
At the closing, certain costs are often prorated (or distributed)
between buyer and seller. The most common prorations are for
property taxes. This is because property taxes are typically
paid at the end of the year for which they were assessed.
Thus, if a house is sold
in June, the sellers will have lived in the house for half
the year, but the bill for the taxes won't come due until
the following year! To make this situation more equitable,
the taxes are prorated. In this example, the sellers will
credit the buyers for half the taxes at closing.
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