Recurring And Nonrecurring Closing Costs In Real Estate
Introduction
When buying or selling a home, there are many costs involved that go beyond the purchase price. These costs are known as closing costs and can be broken down into two categories: recurring and nonrecurring. Understanding the difference between these types of closing costs is important in order to properly budget for the transaction.
Recurring Closing Costs
Recurring closing costs are expenses that will continue even after the home purchase is complete. These costs include property taxes, homeowners insurance, and mortgage insurance. Property taxes are typically paid twice a year and will be prorated based on the date of the sale. Homeowners insurance is an annual expense that is often paid upfront at closing. Mortgage insurance is required for buyers who put less than 20% down on their home purchase and is typically paid monthly.
Nonrecurring Closing Costs
Nonrecurring closing costs are one-time fees that are paid at the time of the home purchase. These costs include loan origination fees, appraisal fees, title insurance, and escrow fees. Loan origination fees are charged by the lender for processing the loan and are typically a percentage of the loan amount. Appraisal fees are paid to the appraiser for determining the value of the property. Title insurance protects the buyer from any potential issues with the title of the property. Escrow fees are charged by the escrow company for handling the transfer of funds between the buyer and seller.
Negotiating Closing Costs
It is possible to negotiate some of the closing costs with the seller. For example, the seller may agree to pay for a portion of the nonrecurring closing costs in order to make the sale more attractive to the buyer. It is important to discuss these options with the real estate agent and lender in order to determine what is possible.
Estimating Closing Costs
It is important to estimate the closing costs in advance in order to properly budget for the transaction. A good rule of thumb is to assume that closing costs will be between 2% and 5% of the purchase price. The lender will provide a Loan Estimate and Closing Disclosure that will detail the specific closing costs associated with the loan.
Conclusion
Closing costs are an important part of the home buying and selling process. Understanding the difference between recurring and nonrecurring closing costs is essential in order to properly budget for the transaction. Buyers and sellers should work with their real estate agent and lender to negotiate and estimate these costs in advance.