Property transactions are expensive and a lot of confusing expenses are included in real estate closing costs. You will have a better experience and be less likely to fall victim to a scam if you learn about these payments. They can be broken down into two main categories:
Both the buyer and seller face their own types of expenses. Also, for different types of transactions you will have different types of recurring and non-recurring payments. Now, let’s look at these broad types of payments and find out what you will have to pay for each categorie.1
Recurring closing costs
Buyers exclusively have recurring closing costs, because once the transaction is over the seller’s obligations are finished. Recurring obligations will continue after you buy your house. You will make your first payment when you settle the contract. Then, you will continue to pay them at regular intervals. They include:
- Home-owner’s insurance
- Property taxes
- Prepaid interest on your loan
- Flood insurance (if it is required)
- Mortgage insurance premium
These are like any other bills you have. You will pay your insurance premiums monthly, while your taxes come due semi-annually. Your mortgage company will usually roll these into your mortgage payment, so you only have one bill to keep up with. Finally, you will make your first payments when you close.2
Non-Recurring closing costs
Non-recurring fees are one-time payments, and you usually have many included. As a buyer you will pay these for inspection of the property itself. Buyers also have fees that go with their loan. Finally, both buyers and sellers have fees associated with the transaction.
Fees associated with the property include inspections. Because you want to make sure that there are no problems with the house you are buying. They include:
- Title search
- Home protection plans (if you decide to buy one)
- Home inspection
These are very important services, and it is very important that you find qualified professionals to do these tasks for you. But they are not the most expensive payments when you close your house.2
While the seller does not pay these, the payments associated with the mortgage are the biggest expenses for the buyer. These include:
- Credit report
- Jurisdictional transfer taxes
- Mortgage fees
If you are the buyer, then the fees associated with your mortgage are by far your largest expense. As you can see, you have both recurring and non-recurring fees associated with the loan.2
Transaction fees are one-time payments for services that go with the legal contract. They include:
These can vary. But for a buyer they will not be the largest expenses, because they do not pay the broker commission. On the other hand, commission is the biggest expense for a seller.2
Calculating Closing Costs
It can be confusing to calculate closing costs, but the mortgage company, real estate agent, and lawyer must provide you documents that explain their expenses that are included. If you don’t understand any of the charges, then you should always ask about them.
Mortgage costs can get very complicated. Fortunately, the federal government mandates that banks provide you a loan estimate to help you. It includes:
- The loan terms: principal, interest rate, monthly payment, and prepayment penalties (if applicable)
- Estimated taxes, insurance, and assessments
- Closing costs estimates, including total required cash
- A full itemization of costs
- Basis figures including annual percentage rate (APR) and total interest percentage (TIP)
The actual costs may vary from the loan estimate, but it is illegal for lenders to deliberately underestimate fees. In fact, some cannot be increased, and the lender will highlight these on the loan estimate. Finally, on average you will pay be around 3% to 5% of your loan amount.2
When you close, both the buyer and seller pay property taxes. Neither the buyer nor seller should pay taxes for a house they don’t own. So, the contract will be very precise about dividing the bill based exactly on the date.
- Sellers pay annual property taxes up to the day of the closing
- Buyers pay taxes for the rest of the year
In some cases, the seller paid prorated taxes. Therefore, the buyer will have to reimburse the seller, and that money will be included.4
Realtor commissions are included in closing costs, and it is typically the seller’s largest payment.
- The buyer typically doesn’t pay for the agent’s commission
- It is paid from the proceeds of the sale, so the seller gets a check minus this payment.
In most cases the agent’s commission is paid to the listing agent (representing the seller). Then, that brokerage company splits the commission with the buyer’s broker. This is based on a prearranged agreement. Tt will be done seamlessly, so, both agents will get paid when the transaction is final.5