Understanding Closing Costs
Purchasing a new home is a big undertaking. There are a lot of players and a lot of moving parts. Obviously, home buyers want to be aware of all of the costs that can be expected along the way. Beyond obtaining a mortgage, there are some additional fees associated with buying a home and particularly for a first-time home buyer, some of these fees might require a bit of explanation.
In order to be prepared for a home purchase, it's important to understand what is included in closing costs. Closing costs are the expenses associated with the sale of a home and are due at closing. Some of these may be paid by the buyer, some by the seller, and some shared by both parties. While some closing costs may be rolled into a mortgage loan, others might not, and buyers should be prepared for payments that become due at the close of sale.
Every home sale is different, so buyers should work with their lenders and their real estate agents to determine what closing costs they can expect to pay. Here are just a few possibilities:
Mortgage application fee. While the buyer sometimes pays this to the lender up front, it might also be rolled into the closing costs.
Credit report. Like the mortgage application fee, this payment is sometimes made by the buyer at the outset of financing negotiations, but it can also be included in closing costs.
Other lender fees. In addition to application and credit report costs, lenders sometimes charge additional fees to research a buyer's loan eligibility and execute the loan.
Appraisal and inspection. Both a professional home appraisal and a licensed home inspection can be required by lender in order to obtain financing; these processes determine home value and condition, respectively. These expenses are usually assumed by the buyer and may be included in closing costs.
Title exam and title insurance. A title exam is conducted to verify that there are no competing claims against a home that might cause problems in the future. This exam verifies that the property is free of claims or liens so that the title can be legally transferred to the new owner. Title insurance is an assurance that the property title is valid.
Brokerage commissions. These fees are usually paid by the seller to the real estate agent for marketing the property and negotiating a sale with the buyer.
Documentation costs. Attorney, escrow, and closing fees associated with the preparation of legal documents are sometimes paid by the buyer, sometimes by the seller, and sometimes shared, depending on the terms agreed to in the sale.
Wire or courier fees. These are expenses associated with transporting documents.
Recording fees. These fees are a payment to the entity in charge of land records for the creation of an official record of the property exchange. Recording fees may be assumed by either the buyer or the seller.
Transaction or document tax. Usually the seller is responsible in paying this legally required excise tax so you should not be concerned with this when it comes to your closing in Massachusetts.
Discount points. Sometimes referred to simply as "points," discount points are a form of prepaid interest on a loan. Buyers may choose to pay points at closing in order to lower the interest rate on the life of a loan.
Closing costs are specific to where a sale takes place and the negotiations specific to the sale, so there is no "cookie cutter" answer to what is included in the closing costs of any given sale. For additional information about what might be included in closing costs, buyers should consult their lenders, agents, and real estate attorneys prior to the close of sale so there are no surprises on closing day.