Buying a Home: Why Closing Costs Change

You're buying a home and have selected a mortgage lender based on a Good Faith Estimate of costs associated with your new home loan. While estimates are helpful for comparing the costs of buying a home and taking out a mortgage, your closing costs aren't "written in stone" until the closing takes place.

Closing (sometimes called settlement) refers to disbursing the proceeds of your mortgage loan to the seller. Real estate closings are conducted by title companies, escrow companies or attorneys according to law in the state where your new home is located.

Closing or settlement agents act as objective third-parties that hold and transfer funds between buyer and seller and take care of documentation, recording and title work. Here are closing costs typically paid by home buyers:

  • Mortgage lender fees and costs
  • Settlement fee (professional fee paid to entity performing the closing)
  • Home inspection fees (examples include water testing and termite inspection; they can vary by region)
  • Title Insurance Policy / Abstract Fee (Lender's title insurance and homeowners title policy)
  • Pro-rated mortgage interest accrued between closing and first payment due date
  • Pro-rated hazard insurance, property taxes and if applicable, flood insurance and/or homeowner association (HOA) fees
  • Private Mortgage Insurance (PMI) premium or FHA Up-Front Mortgage Insurance Premium (UFMIP) if applicable
  • Flood insurance determination fee
  • Government charges including document recording fees and property transfer taxes

Surprise! You Owe More Closing Costs

To keep your blood pressure and vocabulary in check, please keep in mind that every home is unique and so is every closing. Here are examples of situations that can potentially increase your closing costs:

Special assessments: The city or county where your new home is located has issued a "special assessment" to homeowners for improving roads, installing sidewalks or street lights. These assessments are not included in your property tax bill and must be paid in addition to property taxes.

Litigation: Cha-ching! If anyone challenges the sale, title or legal status of the home you're buying, delays could cause closing costs to increase.

Repair costs: Necessary repairs discovered during an appraisal or inspection of the home: Usually, sellers take care of such repairs, but if you're buying a home via short sale or distressed sale, you may have to chip in to pay for required repairs. Mortgage lenders require homes to meet occupancy standards; repairs involving water, plumbing and hazardous conditions will have to be made before closing.

Flood insurance: if your new home is located in a flood zone, your lender will require flood insurance.

Environmental hazards: Discovery of an environmental hazard in your new home may require abatement and you may be asked to contribute to the cost. Examples of environmental hazards include asbestos, lead paint or the presence of black mold.

While these examples are the exception rather than the rule, the Federal Reserve recommends working with your real estate agent or broker to include contingencies for such events in your purchase offer.

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