Understanding Closing Costs

by Charlotte Wood
(last updated February 21, 2009)

Buying a house is a big deal and includes a very complicated process. Alas, home buying isn't as easy as sitting down and signing a few documents. When you buy a house you have to sort out your finances, your loans, and all the other fine print; it's all so confusing! The cost in buying a home isn't limited to just the list price of the home because you have to factor in closing costs. The term "closing costs" however is a bit vague. What are closing costs? And why do you need factor those in to your home buying budget?

Closing costs are essentially the fees associated with actually closing on the house (i.e. transaction and processing fees). There are two kinds of closing costs: non-recurring and recurring costs and those are pretty much self explanatory. Non-recurring costs are those costs that you only have to pay once, while recurring costs are things like property tax and homeowner's insurance that you keep paying throughout the time you possess the house. The costs you really need to focus on when budgeting in a mortgage are the non-recurring costs because those usually need to be paid at the time of closing.

When you talk with your lender about financing your house, they'll usually give you a closing cost estimate and it's safe to assume that the actual closing costs will be more than the initial estimate; budget in more money than the rough amount your lender gives you. Financing closing costs can be a whole other ordeal in itself and is often covered through bridge loans or shorter term loans used to cover the closing costs and paid back after the sale of your previous house has gone through.

Closing costs, in essentials, aren't that hard to understand, but in order to go into your mortgage agreement with a sound foundation, you'll need to understand what exactly those costs go toward and who you're paying. This can all be done when talking and discussing with your lender. It's exciting to buy a house, and while at times frustrating and overwhelming, the satisfaction of buying your own home is irreplaceable!

Author Bio

Charlotte Wood

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