The Closing

Before you can open the door to your new home, you must close the transaction.

When you’ve chosen a home, your financing is in place, and the paperwork is done, only the closing—sometimes called the settlement—remains before you get the keys to your new home. This process varies from state to state and sometimes even within the same state, following local conventions.

Themes and variations

A closing is typically a meeting of all the parties involved in the transaction, or their representatives. This includes you, your lender, the real estate agent, your attorney, the seller, the seller’s attorney, representatives from the title company and the survey company, and perhaps others.

During the meeting, which may be run by the attorney for your lender or by a settlement agent, you and the seller sign the documents that legalize the transfer of the property, the seller is paid, and you write checks to cover all the remaining charges.

The process is different when settlement is handled by an escrow agent. Then there isn’t a gathering of the interested parties. Representatives for the buyer and seller sign the required papers, hand over the checks, and mail the documents to you when the transaction is completed.

Official documents

You should receive a Closing Disclosure from your lender three days before the scheduled closing. This five-page document details the terms of the loan, provides important disclosures, and itemizes all its costs, including projected monthly payments and closing costs. These numbers should match the ones provided on the lender’s Loan Estimate. If you find any errors or have questions about any of the terms, follow up immediately.

You should review the other essential closing documents, too, including the promissory note, the mortgage—also known as a deed of trust or security document—and the deed, in advance. You’ll find sample copies of the forms, with explanations, on the Consumer Financial Protection Bureau website (consumerfinance.gov/owning-a-home).

The money trail

When closing is over, you begin to make your monthly mortgage payments. It probably will feel a lot like paying rent. But it’s different: You’re buying something of value with each payment.

Basically what happens is that you mail a check or, more frequently, arrange an electronic transfer of money from your account to the account your lender has designated to receive the payment. At least once a year, and sometimes more often, you’ll get an account statement detailing what you’ve paid and where you stand in building your equity. Your tax-deductible interest payments will be listed separately. You should save these statements as part of your permanent record.

Prepaying the bills

You may be billed separately to cover real estate taxes and insurance, or those amounts may be itemized on your payment invoice each month. Typically, you make the first payment toward these expenses at the closing and a little more than one-twelfth of your annual total with each of your monthly payments. This process guarantees there’ll be money available as the bills come due.

These prepayments may go into an escrow or impound account—basically, a parking place—from which your payments are withdrawn. In many states, the law requires that escrow accounts pay interest, though the rate is typically low. State laws may also require that at least one month a year your escrow account should hold no more than one-sixth of your total tax and insurance bills. Typically, it’s the month following the month your largest bill is paid.

Paying your share

You typically split some of the annual costs of owning the home with the seller. For example, suppose you buy a home on June 1, and the seller has paid school taxes for the year on December 1. The seller would absorb six months of the tax bill—the length of time spent in the house that tax year—and you would reimburse him or her for the other six months, when you’ll be living in the house. In this case, if the tax was $2,500, you’d owe the seller $1,250.

At your service

In many cases, the lender who provides your financing continues to collect your payments as long as you live in your home. But sometimes the contract is sold to another provider. If that happens, the terms of your agreement don’t change, but the address to which you send your payment does, and so do the people you deal with if questions arise.

When you sign your initial financing agreement you must be told whether your contract can be sold and what your provider’s past practice has been. Some providers routinely sell and others don’t. If your contract is sold, the bank or other financial services company that collects your payments is known as the servicer of the loan. This firm keeps records of your payments, recalculates payments due on ARMs as required, and reports information on your tax-deductible expenditures to you and the Internal Revenue Service (IRS) using IRS Form 1098.

What closing costs cost

On average, closing costs are 2% to 3% of the amount you’re borrowing, though they could be 6% or more in areas where property taxes, state transfer fees, or both, are high. Since these costs must be paid in cash, you need to anticipate them in calculating what you can afford to spend on a home.

This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.