Buying a home involves time, energy, and, most of all, money. In addition to committing yourself to mortgage payments for 15 to 30 years, you need quite a bit of money "up front" to close the transaction that will make the house yours. There are several types of closing (or settlement ) costs and other up-front costs you should be prepared to pay..

Financial closing costs are paid by both the buyer and the seller. In some areas, custom or tradition calls For the seller to pay for certain expenses and the buyer to pay for others. One way to minimize closing expenses is to negotiate some of them as part of the purchase offer. Some fees are set by law, and therefore are not negotiable. Others are set by the local real estate and financial markets and may be more flexible.

What Happens at Closing
Much of the paperwork involved in closing (or settlement) is done by attorneys and real estate professionals. You may be involved in some of the closing activities and not in others, depending on local customs and on the professionals with whom you are working.

Before you close on your property, you should have a final inspection, or walk-through, to make sure any repairs you requested have been made and that items which were to remain with the house (drapes, light fixtures) are still there.

At the closing, ownership officially is transferred from the seller to you. It may involve you, the seller, the real estate agent, your attorney, the lender's attorney, representatives from the title or escrow firm, and a variety of clerks, secretaries, and other staff. It is possible to have an attorney act on your behalf if you cannot attend the meeting (for example, if the house is in another state). Closing can take as little as an hour,or it an take several hours, depending on the contingency clauses in the purchase offer (and any escrow accounts that may need to be set up).

In some states, settlement is done by a title or escrow firm to which you forward all the materials and information along with the appropriate cashiers' checks, and the firm will make the necessary disbursements. The closing attorney, real estate agent or a representative of the title company will deliver the check to the seller and the house keys to you.

Statutory Costs
Statutory costs are expenses you would have to pay to pay to state and local agencies even if you paid cash for the house and did not need to take out a mortgage. They include the following:

Transfer taxes are required by some localities to transfer the title and deed from the seller to you.

Recording fees for deed pay for the county clerk to record the deed and mortgage and change the property tax billing.

Other state and local fees, which can include mortgage taxes levied by states as well as other local fees.

Prorated taxes such as school and municipal taxes may have to be split between you and the seller because they are due at different times of the year. For example, if taxes are due in October and you close in August, you would owe taxes for 2 months while the seller would owe taxes for the other 10 months. Prorated taxes usually are paid based on the number of days (not months) of ownership. Some lenders may require you to set up an escrow account to cover these bills. If your lender does not require an escrow account, you may want to set up a special account on your own to make sure you have money set aside for these important, and sometimes large, bills.

Third-Party Costs
Third-party costs are expenses paid to others such as inspectors or insurance firms. You would have to pay many of these expenses even if you paid cash for the house. Examples of third-party costs are as follows:

Attorney fees. You will probably want to work with an attorney when buying a home. Attorneys usually charge a percentage of the selling price (three-fourths or 1 percent), but some may work for a flat fee or on an hourly basis.

Title search costs. Your attorney will arrange for the title search to make sure there are no obstacles (liens, lawsuits) to your owning the home. In some cases, you may work with a title company to verify a clear title to the property.

Homeowner's insurance. Most lenders require that you prepay the first year's premium for homeowner's insurance (sometimes called hazard insurance) and bring proof of payment to the closing. This insures that their investment will be secured, even if the house is destroyed.

Real estate agent's sales commission. The seller pays the commission to the real estate agent. If one agent lists the property and another sells it, the commission usually is split between the two. It's important to keep in mind that even the commission is negotiable between the seller and the agent.

Finance and Lender Charges
Most people associate closing costs with the finance charges levied by mortgage lenders. The charges you pay will vary among lenders, so it pays to shop around for the best combination of mortgage terms and closing (or settlement) costs. You may have to pay the following charges:

Origination or application fees. These are fees for processing the mortgage application and may be a flat fee or a percentage of the mortgage.

Credit report. A credit report is required on all mortgages, and this fee is typically part of the application fee.

Points. A point is equal to 1% of the amount borrowed. Points can be payable when the loan is approved (before closing) or at closing. You may want to negotiate points in the purchase offer. If you pay the points up front, they are deductible in your income taxes in the year they are paid. Different deductibility rules apply to second homes.

Lender's attorney's fees. Lenders may have their attorney draw up documents, check to see that the title is clear, and represent them at the closing.

Document preparation fees. You will see an amazing array of papers, ranging from the application to the acceptance to the closing documents. Lenders may charge for these, or they may be included in the application and/or attorney's fees.

Preparation of amortization schedule. Some lenders will prepare a detailed amortization schedule for the full term of your mortgage. They are more likely to do this for fixed mortgages than for adjustable mortgages.

Land survey. Most lenders will require that the property be surveyed to make sure that no one has encroached on it and to verify the buildings and improvements to the property.

Appraisals. Lenders want to be sure the property is worth at least as much as the mortgage. Professional property appraisers will compare the value of the house to that of similar properties in the neighborhood or community.

Lender's mortgage insurance. If your down payment is less than 20%, many lenders will require that you purchase private mortgage insurance (PMI) for the amount of the loan. This way, if you default on the loan, the lender will recover his money. These insurance premiums will continue until your principal payments plus down payment equal 20% of the selling price, but they may continue for the life of the loan. The premiums usually are added to any amount you must escrow for taxes and homeowner's insurance.

Lender's title insurance. Even though there is a title search for any obstacle (liens, lawsuits), lenders require insurance so that should a problem arise, they can recover their mortgage investment. This is a one-time insurance premium, usually paid at closing; it is insurance for the lender only, not for you as a purchaser.

Owner's title insurance. You may want to purchase title insurance for yourself so that if problems arise, you are not left owing a mortgage on a property you no longer own. A thorough title search (going back to 1900 if necessary) is often assurance enough of a clear title.

Release fees. If the seller has worked with a contractor who has put a lien on the house and who expects to be paid from the proceeds of the sale of the house, there may be some fees to release the lien. Although the seller usually pays these fees, they could be negotiated in the purchase offer.

Inspections required by lender. (termite, water tests) If you apply for an FHA or VA mortgage, the lender will require a termite inspection. In many rural areas, lenders will require a water test to make sure the well and water system will maintain an adequate and safe supply of water to the house.

Prepaid interest. Your first regular mortgage payment is usually due about 6 to 8 weeks after you close (for example, if you close in August, your first regular payment will be in October; the October payment covers the cost of borrowing money for the month of September). Interest costs, however, start as soon as you close. The lender will calculate how much interest you owe for the fraction of the month in which you close (for example, if you close on August 25, you would owe interest for 6 days).

Escrow account. Lenders will often require that you set up an escrow account into which you will make monthly payments for taxes, homeowner's insurance, and PMI (mortgage insurance, if required). The amount placed in this escrow account at closing depends on when property taxes are due and the timing of the settlement transaction. The lender should be able to give you a close approximation of these costs at the time you apply for your mortgage loan.

Other Up-Front Expenses
The major portion of other up-front expenses is the deposit or binder you make at the time of the purchase offer and the remaining cash down payment you make at closing. In addition to the deposit and down payment, other up-front expenses can include the following:

Inspections. (structural, water quality tests, radon tests) In addition to inspections required by the lender, you may make the purchase offer contingent on satisfactory completion of some other inspections. You and the seller will need to negotiate these fees.

Money to the seller. (for example, for fuel oil in the tank) You will need to pay for items in the house that you want and that were not negotiated in the purchase offer. Such items may include appliances, light fixtures, drapes, or lawn furniture and also fuel oil and propane left in tanks.

Moving expenses. If you are changing jobs, your new employer may pay for your move. Otherwise, you must figure in the cost of moving, either truck rental and hired help or a professional mover. Shopping around for moving services can pay off. You will also need cash for utility deposits (phone, cable, and the like).

Escrow account funds. (for example, for cleanup, radon mitigation, untested appliances) In the purchase offer, you can request that the seller set up an escrow account to defray any costs of major cleanup, radon mitigation procedures, house painting, or other items. Also, if you have not had a chance to try out some appliances (the furnace if you buy in the summer or the air conditioner if you buy in the winter), you may request an escrow account to cover repairs if necessary.

Depending on the purchase offer contract and contingency clauses, you may find you have some expenses immediately upon moving in. For example, suppose your purchase offer contract has a clause making the purchase contingent on a satisfactory structural inspection, and the inspector determines that the house will need a new roof. You could negotiate to have the seller arrange for the work to be done, but this will probably delay the closing date--and you may have to agree to a higher price for the house or to cover some of the expenses of the new roof. Oryou and the seller may be able to split the cost of a new roof, put on after you move in, using estimates from a contractor of your choice, each of you putting funds into an escrow account for the new roof. Or the seller may be willing to reduce the sale price of the house by an amount you think is fair. In either case, shortly after moving into your new home, you will need cash for a new roof.