Closing costs are fees associated with the finalization of a real estate contract and the origination of a loan, and they can vary considerably, depending on the situation. In order for the deal to go through, the buyer must have these funds on hand at closing, when the change of ownership takes place. Estimated closing costs are provided by real estate professionals and lenders at the start of the escrow period to give buyers and sellers an idea of the closing costs they can expect with their particular real estate deal.
Estimated closing costs include obvious things, like the amount of the down payment on the property, title fees, insurance fees, cost of a home warranty, recording fees, and fees associated with credit checks. They can also include the expenses of the real estate professionals and lawyers who are involved in the closing, such as courier fees for getting documents where they need to go, and fees associated with the loan itself, like points which a buyer may pay to reduce interest. For people joining condo or homeowner associations with the purchase of a property, these fees will also be due at closing and included in the estimated closing costs.
Once the buyer and the seller have agreed on the cost and entered escrow, a lender can estimate the closing costs for the deal, taking the details of the situation into account. The estimated closing costs provided by the lender show the buyer and seller the amount of money they will need to have on hand at closing, but it is important to remember that they are only an estimate; the actual closing costs may be lower or higher. For this reason, people are often encouraged to put slightly more than they need into escrow, and to bring a checkbook to the closing to deal with unexpected costs. If a property is being purchased without a loan, there are still closing costs which can be estimated by a real estate lawyer or real estate agent.
There are a number of techniques which can be used to reduce closing costs. Once someone has estimated closing costs in hand, he or she may consult a real estate professional or lawyer to find out if those costs can be reduced. Buyers and sellers may also negotiate the terms of the closing costs. An eager seller might, for example, agree to cover some of the closing costs incurred by the buyer, thereby reducing the amount of cash on hand the buyer needs at closing.
When people receive estimates of their closing costs, they should review them closely. Costs may be lumped into mysterious categories or referred to cryptically, and it pays to ask a professional to break down the closing costs in plain language. The eye of an expert can reveal costs which are inflated or do not belong in the estimate, and clarify the process for people who have not gone through it before.