Tag Archives: closing costs

What the !%@#$ are closing costs?

Confused stick figure and humorous breakdown of closing costs

It's only scary because it's vague.

Closing costs. The term can strike terror into the hearts of most first time buyers. Leave it to the real estate industry to come up with a special snowflake term for something the rest of the world understands as "sales tax." Admittedly there's more components involved than your standard skimmed bit off the top taken by the government every time you make a purchase. (Unless you live in New Hampshire, Delaware, Montana, Oregon or Alaska.) Legally we can't call it "sales tax." But for homeowners who are already making a big plunge here, it's probably easier to think of closing costs in the same manner as sales tax and plan accordingly.

In Chicago these days, provided you're taking out a loan of less than $417,000, for closing costs you'll want to plan on needing about 3-4% of purchase price, in addition to your down payment and your loan, in order to buy a piece of property. If your lender chooses, they may require you to pay "points" to decrease your mortgage interest rate - in this case, add one percentage point for each "point." Some lenders will charge less, some more, but on the average it will be between 3-4%. If you have reasonable credit and it looks like your lender is charging more than 4% on the good faith estimate, go find a new lender!

Despite the government requirement of reasonably accurate Good Faith Estimates from lenders, the actual cost to close will not be revealed to you until the day before you actually close, on a form called the HUD-1. Therefore, for the majority of the purchase process you will need to be carrying that number in your head.  Don't forget about it and add the amount to your down payment. Don't leave it tied up in non-liquid accounts until the last minute, either. Bits of it will be dribbling out from the day you get a signed contract to the day you receive the keys. (more…)