What is the main purpose of closing costs?

The main purpose of closing costs is to cover fees associated with completing a real estate transaction. These costs encompass various fees that are required to finalize the transfer of property ownership and the processing of a mortgage loan. Closing costs typically include expenses such as lender fees, title insurance, recording fees, and attorney fees, among others. They ensure that all legal requirements and administrative tasks necessary to complete the transaction are completed, allowing the buyer to take possession of the property and the seller to receive their funds.

While fees for property inspection services might be part of the overall transaction process, they are specifically separate from closing costs and may not always be incurred at closing. Reducing the loan balance is more about applying payments to the principal of the loan rather than a purpose of closing costs. Providing homeowners insurance is also not a primary function of closing costs; rather, it is a separate requirement for homeowners to protect their investment after closing. Thus, the coverage of fees necessary for completing a transaction is what truly defines the essence of closing costs.