If you are considering getting a ‘first time’ mortgage, and you don’t have a financial training background, then be ready to encounter quite a bit of jargon. This is jargon that you will have to make sense of, for it has a direct bearing on your financial well-being. It is not jargon that you can simply let be, as you focus on the ‘big picture:’ for it is actually part of that ‘big picture.’
One of the terms you are likely to be hearing a lot, as you talk about mortgages with the mortgage lenders who give them, is the term ‘closing costs.’ It won’t, therefore, be surprising if you find yourself wondering exactly what closing costs are, and what their impact on you is.
As it turns out, the term ‘closing costs’ as used in mortgage circles (and indeed in the whole real estate sector) refers to what may otherwise be termed as ‘transaction costs.’ These are costs that are incurred to facilitate the transaction, but are not part of the actual purchase price.
An illustration would come in handy here.
Let’s say you are looking to purchase a property worth $100,000. That figure $100,000 is the listed purchase price for the property. But in order to actually get to meet with the people selling the property, you find yourself having to pay a realtor something, say $500 – for facilitating that meeting/coincidence of needs. Once you meet with the developers, and come to some sort of agreement, it follows that you have to get an attorney to oversee the legalities of the transaction. Lawyers charge quite a bit for this sort of service, and you end up coughing out another $1,000 for this, with the developers coughing a similar figure: for the legal service. Before you pay your $100,000 for the property, you feel an urge to be sure that the property is really worth that much – and you end up retaining the services of a property valuer for this purpose, at a fee of something like $500.
In the final analysis then, by the time the purchase transaction is through, it emerges that in addition to the quoted price for it of $100,000, you have also paid $500 for the realtor’s service, $1,000 for the attorney’s service and $500 for the valuer’s service. A total of $2,000, just to make the transaction go through. Now it is these extra costs, paid just to make a transaction go through, which are referred to as the ‘closing costs.’
Generally, your aim should be to try to keep the ‘closing costs’ down, while ensuring that you don’t put yourself at the risk of losing much more in the future, in a bid to save on essential closing costs.
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