February 29, 2016 by Jed Bratt
Ever wonder what the heck “closing costs” are anyway?
Read forth and wonder no more, my newly learned friend…
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In any Real Estate transaction—whether as a home buyer or seller—there are costs associated with closing the deal. These “closing costs” are paid to the applicable parties at the Close of Escrow (“COE”) after the loan is funded (if applicable). Some of these costs are specific to either the buyer or the seller, while some may be shared by both parties.
For example, commissions for both the buyer’s agent and the listing agent are traditionally seller costs, appraisal and loan costs are expenses of the buyer, and escrow fees are often split between both parties.
Note: Closing costs should not be confused with the down-payment, which is a portion of the purchase price which is applied towards the purchase.
A “closing cost” is a very broad term and covers expenses such as title and escrow fees, commissions, pro-rated property taxes, title insurance, the appraisal, loan discount points, underwriting fees, fees for running the buyer’s credit report, and recording fees—to name a few. (Go HERE to learn more about the other parts of the Home-Buying process).
Note: Often in an equity sale (meaning the sales price of the property is greater than the loan balances, liens and other debts against the property), the seller’s closing costs will be paid out from the proceeds at close, so long as the total proceeds cover all of the debt.
On the buyer’s side, the buyer may pay for the closing costs at close out of his or her own pocket, or may request for the seller to provide a “credit” towards the buyer’s costs during the negotiation of the Purchase Agreement (go HERE for more information on the Purchase Agreement). If you’re a home buyer, you’ll want to keep in mind that whatever amount you ask for from the seller, inversely affects the desirability of your offer, as it increases the seller’s expenses.
In many situations in which the buyer is obtaining financing for the purchase, the buyer may also utilize a “lender credit” to cover all or a portion of the closing costs. A lender credit, simply put, is a a credit the lender applies towards the buyer’s costs in exchange for a higher interest rate. We’ll discuss the lender credit more in another video.
For now, just remember that closing costs are a part of every transaction, and will need to be planned for when buying or selling a home.
There are many other moving parts to buying or selling a home! If you’re just beginning, check this article out about the loan pre-approval and how important it is if you are serious about purchasing a home.
If you’re just curious about buying a home and want to explore your options, go HERE and search the entire San Diego County MLS!
If you’re ready to BUY or SELL a home, give us a call today and let’s talk: (619) 537-6016.