Closing Costs Explained

If you've ever purchase a home or are thinking about buying a home for the first time, someone's probably already whispered in your ear that closings are expensive.   While there is no doubt that buying a home is pretty commonplace, it is by no means a simple financial transaction.  You're going to realize this as we explain to you some of the most common closing costs you'll encounter when buying a home.

HUD Settlement Statement at Closing

The good news is that all of your closing costs are calculated in one place and the form is standardized.  The HUD Settlement Statement is the form that used to summarize all the costs you'll be expected to pay at a closing.  Before you close on a new home, it's very likely that you will have seen the form at least two times before the closing date - once from your mortgage company and another time from your attorney.

So you should be familiar with the statement before you ever close on a home - that's the good news.  But if you're a first time home buyer, you might want to have an idea of what to expect.  If you're interested in finding out how much a closing might cost, you might want to look at our article on Closing on a Home.

Closing Cost Breakdown

Closing costs are broken down into two main categories - the Buyer's Transactions and the Seller's Transactions.  Money and property is being exchanged between these two parties, so it only makes sense that the closing cost documentation reflects that relationship.

The bottom line at the closing is the cash paid to or from the borrower OR the cash paid to or from the seller.  Over the remainder of this article, we're going to explain what goes into those calculations and later on we'll even provide an example summarizing all costs.

Total Settlement Charges

In order to figure out how much money is transferred from the borrower (the buyer) to the seller at closing, there is another worksheet that acts as backup to the closing cost breakdown and it's called the Total Settlement Charges.  This form is composed of about 50 or 60 line items, most of which are rarely used.  Some of the commonly used line items include:

Items Paid in Connection with the Loan

This can include lock in fees, credit reports fees, application fees and commitment fees paid by the borrower to their mortgage company or lender.  Before you close on a home, you would have paid most of these fees as part of the process of obtaining a mortgage.  So while it's good to understand exactly what you've spent in acquiring a loan, these are really prepaid items.

If you've chosen a mortgage that requires points to be paid, this is where you should also see the charge for the prepayment of mortgage points.  Mortgage points are usually one of the more expensive line items appearing on this form.

Items Required by Lender to be Paid In Advance

Typically, your lender might require you to purchase mortgage insurance, or PMI if you don't meet their down payment requirements - usually 10 -20% of the home's value.  You'll also be asked to pay interest expense from the day you close until the day your first mortgage payment is due.  And that brings up a good point.

One of the ways you can help to minimize your closing costs is the schedule the closing date towards the end of the month - some people believe this is the best day to close on a home.  By doing so, you will reduce the interest charges you have to pay at closing.  On the other hand, closing at the end of the month means your first mortgage payment is due sooner.  The bottom line is this - as long as you've got a mortgage, you need to pay your lender for the use of that money.

Reserves Deposited with Lender

The biggest reserve line item you'll have with your lender is your city / county property taxes.  Most lenders like to have at least three months of property taxes held in an escrow account.  Depending on when your taxes are due and the month that you close on your home, you can expect to pay anywhere from 3 - 5 months of property taxes at closing.

Title Charges

The two most common charges associated with the exchange of the Title to the home are attorney fees and Title insurance.  So the closing fee you've negotiated with your attorney should appear in this section as will the cost of the title insurance.

Government Recording and Transfer Charges

Most counties charge nominal fees to record changes to a deed or mortgage.  It's likely that your attorney paid these fees on your behalf when filing these legal documents.  So this money will eventually flow back to your attorney.  That is, your attorney will get paid for this service during the home's closing.

Additional Settlement Charges

This is a catch-all category of expenses that includes such things as survey fees and courier charges (FedEx, UPS, U.S. postage).  Once again, your attorney is likely the party to have paid for these services as part of moving all the legal paperwork around.  So you'll be reimbursing your attorney for these expenses at the closing.

Finally, the sum of all the above will equal to your total settlement charges. When most people talk about closing costs, they are usually referring to the total settlement charges.

Cash at Settlement

Earlier we talked about the concept of cash at settlement.  This is where the sales price of the home, deposits held by attorneys, the mortgage, down payments and closing costs all come together and your attorney figures out who has to pay what amount.

If you're buying a home, you can expect the cash at settlement from the borrower (that's you in this example) to be roughly equal to the amount you've promised to put down on a home plus your total settlement charges minus any deposit money held by your attorney.

Example Summary Closing Statement

Here's an example of what the major components of the borrower's section might look like at closing.  In this example, let's say you're buying a home for $300,000 and you've decided that you need a mortgage in the amount of $200,000.

In the above example, the settlement charges were $5,000 and you've already given your attorney a deposit of $15,000 on the home.  Effectively, $5,000 of the deposit is applied to your settlement costs.  So in this example, you need to present a cashier's check for $90,000 at the time of closing to match the cash from borrower amount.

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