An Introduction to Closing Costs
While buying a home can be an exciting experience filled with dreams in anticipation, one thing that escapes many new homeowners is the reality that there are costs associated with purchasing real estate. It's not as simple as making an offer on a $70,000 home, paying 8% as a down payment, and then getting a bank to finance the rest. There are other things in the process that needs to be paid for in order to close the deal. These things are known as closing costs, and to the surprise of many a new homeowner, they usually run into the thousands of dollars before all is said and done.
Buyer and Seller Closing Costs
In any real estate transaction you have some closing costs covered by the buyer and others covered by the seller. Examples of buyer closing costs would include mortgage application fees, appraisal and inspection fees, tax adjustments, and homeowner’s association dues. For sellers, typical closing costs include attorney’s fees, title search fees, and broker commissions. While it's possible that both parties in the transaction could pay all their own closing costs upfront, it doesn't always work that way in the typical real estate transaction.
Often times first time home buyers find closing costs can be financially prohibitive. To make things easier, it is common practice to offer a higher price than is being asked with the stipulation that the seller then cover all of the closing costs. In essence, the buyer is still paying his own closing costs but doing so in the form of a higher purchase price. There are also many scenarios in which individuals can receive gifts, grants, or other assistance to pay their closing costs. As for sellers, they are usually left to take care of closing costs on their own - either out of pocket, or from the proceeds of the sale.
Wall Street Home Resale Fee
A rather new and insidious closing cost being foisted upon sellers is known as the Wall Street Home Resale Fee, or private transfer fee. The creators of this fee got their idea from homeowners associations who collect a fee whenever a condominium or house that's part of the association is sold. The only difference being that the homeowners association fees are returned to the homeowner in the form of services rendered. With the private transfer fee no one benefits except for the third-party who created it. So who creates such fees?
Typically the Wall Street Home Resale Fee is originated by a builder or land developer and is attached to the sales contract of a newly built home. It's not uncommon for these fees to be attached to the property for up to 99 years, requiring that every time the property is sold within that time frame the originator of the fee is paid 1% of the purchase price. This language is often inserted into sales contracts without the knowledge of the home buyer who is prone to simply signing documents on closing day in order to finally put an end to the ordeal of building a home.
Not only are these private transfer fees unethical, but they also make your home much more difficult to sell. Home buyers don't necessarily mind paying fees to homeowners associations, because they know those fees benefit them in some way. But many are reluctant to pay a private transfer fee because they gain nothing from it. And unfortunately, those fees have to be disclosed when you sell your home.
Calculating Closing Costs
Calculating your closing costs is not rocket science, but it's nearly impossible to determine the exact amount prior to closing. That's because there are so many variables involved and anything can change between the date the purchase offer is signed and closing. However, you can come up with a fairly accurate estimate. Your attorney or real estate broker will be able to make a good calculation for you inside 10 minutes.
If you prefer to try to calculate closing costs on your own, there are free tools on the Internet to help you. You'll enter such information as the purchase price of the home, your down payment amount, the interest rate and points paid, and a list of other things. The calculator uses average prices for the various costs involved and spits out a number for you. Again, while it won't be accurate down to the dollar, it will provide you with a good ballpark figure.
