In modern practice, closing costs refers to any expense that has to be paid in order to complete and close a real estate transaction.
However, in the lending market, closing costs refers the all the expenses necessary to close a loan.
Because of how much of a role lenders play in a property transaction due to mortgages, the term closing costs can be a source of confusion and misinterpretation by professionals.
This is why when it comes to real estate, closing costs for loans are also referred to as settlement costs.
While closing costs refers to all expenses incurred to close a real estate transaction. This would include settlement costs.
Here are expense items that make up closing costs.
Agent fees
As long as there is an agent involved in the transaction, agent commissions will be paid one way or another, directly or indirectly.
No agent will work for free. At least none of which I have met do.
Legal fees
Qualified lawyers are required for conveyancing and stamping.
Even though they are probably using the same template of contracts and documents for each client, they still charge professional fees for changing the names and details on the template.
Settlement costs
As mentioned previously, these are all the necessary expenses to close a loan.
It will include fees payable to:
- Credit bureaus
- Appraisers
- Surveyors
- Mortgage insurance
- etc
And their own charges for:
- Processing
- Administration
- Underwriting
- Points
- etc
Borrowers can often get cash rebates and waivers for the fees charged by lenders and their associated third parties.
But surely you should know that any lender offering discounts will have already factored that in with the original quote.
Taxes
You can bet that the IRS will be calling for their share as well.
You might need to settle outstanding or current taxes in order to close.
Insurance
In many parts of the world, fire insurance is a necessary insurance policy for property owners.
Sort of like it’s illegal to drive without auto insurance.
At this point you can fully depend on an insurance agent to try to upsell you with a hundred other policies.
More service providers
The list of closing costs items never seem to end.
I’ve even had people insist that purchases at the hardware store count as part of closing costs are tools were bought to fix things in order to satisfy a buyer.
And you just can’t fully object to that conclusion.
So here is a list of more miscellaneous cost items.
Title company
Escrow service
Home inspectors
Pest control
Critical repairs
Relevant government agency fees