In addition to a down payment and monthly mortgage payments, there are quite a few other costs to take into consideration when purchasing a home. What are commonly referred to as “closing costs” can typically add another 2 to 5 percent to the purchase price of a home. The lack of precision in calculating these costs until very close to the end of the purchase process may lead to some sleepless nights.

πŸ’² What are closing costs?

Most buyers are aware of the many pre-closing costs involved with buying a home, including appraisals, home inspection fees, property survey and/or the payment of down payments and deposits. However, closing costs are additional to the home’s purchase price and occur at the very end of the buying process. The payment by the buyer (and, in some cases, the seller) “closes” the deal so that ownership may be legally transferred. In some cases, it may be possible to roll closing costs into the cost of your mortgage – but every lender and situation is different. Don’t be afraid to ask because these types of costs can often be negotiated.

πŸ“ What are closing costs based on?

An itemized list of closing costs will be offered to the prospective buyer twice. The first one is an estimate of anticipated costs, and it’s triggered when you apply to make an offer. A second, often substantially different list, is part of the closing period and can arrive as late as 3 days before the agreed upon closing date. It’s different because items specific to the circumstances of the sale may be added. Certain legal, administrative costs, and disbursements are a good example.

Even if things remain simple, additional costs can add up. Don’t be afraid to challenge each item or ask for an explanation if the initial estimate and the final list of closing costs are quite far apart. Some legal or financial professionals expect the buyer to assume the cost of every courier delivery or postal charge. They may be persuaded to remove some of these smaller costs with push back.

πŸ’΅ What are typical closing costs for buyers?

There is an array of costs that may be presented at closing. Some may cost a few hundred dollars, but others can add thousands to the final tally. Common closing costs can include, but may not be limited to, the following:

Land transfer tax – most jurisdictions demand a tax when ownership of land changes hands. The amount can vary widely from state to state or between urban and rural districts.

Legal fees – most home sales involve an attorney who reviews the closing documents and fees will be due right away

Title insurance – title insurance ensures the purchase if for some reason the title search fails to reveal a prior claim to the property or any other problem with your home’s title

Mortgage insurance – this type of insurance comes into play when down payments are smaller (usually less than 20%). Often the first installment is due at closing. Similarly, the first year’s home insurance, protecting your property, may also be due at closing

Unpaid utilities or property taxes – these must usually be paid up as part of the closing process

Home or community association dues or fees – depending on the community you are moving into home association dues may be required at closing

These are just a few of the most common closing costs. There may certainly be other administrative costs and fees that will crop up on your final checklist depending on your lender, the deal you have with your vendor and the circumstances and location of the sale. Estimate generously to avoid last minute financial scrambling.

πŸ’Έ What closing costs are tax deductible?

Unfortunately, you don’t get much of a tax break on closing costs when you purchase a home. But be sure to investigate and keep records of each item to be paid because a few can be claimed. In the year of purchase, for example, mortgage interest and some property taxes are tax deductible.

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