What are Closing Costs?

“Closing costs” is an umbrella term which covers many fees and costs that are incurred when you become the new legal owner of a home. This interim period between buying a home and becoming the legal owner is often called “closing” or “settlement”. For the most part, closing costs cover a large number of processes that need to happen at this time.

Even if you buy a house, the title is still with the previous owners, making it legally their home. The title is basically a document which says who owns a property. Transferring this title to a new owner incurs closing costs. The costs included also extend to the federal government, as you can expect to pay recordation taxes, transfer taxes, and taxes & stamps when becoming a new titleholder. This is because the government has to make changes to public records, citing you as the new owner of the home. The “closing fee” that the title company charges you essentially pays for the overseeing of this process.

Part of the title company’s job is to collect public records on the current owners and check that the house they are selling actually does belong to them in the first place. This fee is called a “title search”, and is intended to stop people from selling homes that they have no legal right to sell.

A title company may additionally charge you for “title insurance”. Although “title insurance” may sound like a largely pointless add-on, it does have potential value. “Title insurance” is designed to protect you (as the new owner) in the event that a long-lost family heir, spouse, or debt collector (relating to the previous owners) suddenly turns up and demands possession of your new house. This insurance is in place because many of these distant connections will not show up in public records, or may show up after the title has already been transferred to the new owner. Title insurance is basically protecting the new owners from forces that they were not aware of at the time of sale.

There are many additional closing costs to consider for both parties, these include attorney fees, appraisal fees, inspection fees, home warranties, and much more. Upon the settlement of a home, a “Closing Disclosure” form will be provided to the borrower by the lender. This 5-page Closing Disclosure form lists all of your closing costs, as well as information such as your loan terms and monthly payments. This form is an amalgamation of several now-obsolete forms, and allows you to track all of your home-buying costs in one convenient place.