Margus Deery's Blog
When you’re buying a home, there’s a lot to think about. Your finances probably have the biggest impact in the entire home search process. The amount of a down payment you have and the amount of loan you’re approved for help decide what you can buy.
When you hear about closing costs, what do they entail? How much will you need to cover these costs? Many people get to the closing table for their home purchase and feel unprepared. You’ll need a certain amount of cash on hand when you finally close on a home. Learn more about closing costs, so that you understand everything that you need to know about your home purchase.
Closing costs are spelled out pretty plainly in just about every kind of real estate contract. These costs are the fees associated with the title companies, attorney, banks, lenders and everyone else who is involved in the purchase of a home. The closing table is also the time when you provide your sizable down payment. The closing costs that are being referred to are considered a separate expense independent of the closing costs.
Closing Costs Vary
Closing costs can range from anywhere between 2 and 8 percent of the purchase price of the home. You can’t really “choose” what’s included in the closing, so you’ll need to have an idea of how much money you’ll need to write a check for. Lenders can give you an estimate of about how much closing costs will be.
Certain things like the realtor’s commission fees can be negotiated and can be paid for by the buyer or the seller. The good news is that you can roll your closing fees in with your mortgage in some cases. You may also be able to negotiate with your lender to pay the closing costs for you in exchange for a higher interest rate.
What’s Included In Closing Costs?
Depending upon where and what type of home you’re buying, what the closing costs actually cover varies. Here’s just some of the things that closing costs cover:
- Escrow fees
- Credit reports
- Title search
- Title exam fee
- Survey fee
- Courier fee (Most transactions are done electronically, but in some cases this may be necessary)
- Title insurance
- Owner’s title insurance
- Natural hazards disclosure
- Homeowner’s insurance (Your first year of insurance is often paid at closing)
- Buyer’s attorney fee
- Lender’s attorney fee
- Transfer taxes
- Recording fees
- Processing fees
- Underwriting fee
- Pre-paid interest
- Pest inspections
- Homeowner's association transfer fees
- Special assessments
These fees vary widely by state and the type of property that you’re purchasing. Not every fee is required, but the above is just a list of many of the possible fees that could be included in on the closing of the home you choose.
Buying a home is probably the largest purchase you will make in your lifetime. In spite of down payments and monthly mortgage dues, you’ll also have to plan for the fees that come with purchasing a home. These expenses are collectively known as closing costs.
Just how much can you expect to spend on closing costs when buying a house? Experts say that closing costs amount to anywhere between 3 and 5% of the cost of the home. So, if you buy a $250,000 home, you could pay as much as $12,000 in closing costs and associated fees.
Coupled with a down payment that is due at the time of signing, closing on a home can get very expensive very quickly. But we’re here to help you understand the cost of closing and how you can potentially cut some of those costs that are due at the time of signing. Read on to learn how.
What are closing costs?
There are dozens of possible expenses that may come up at the time of closing. Depending on your unique situation, you might pay for several or just a few of them. Some common closing costs include:
Mortgage application fee. This fee describes the cost of processing your mortgage application. Be sure to go over everything that this fee covers with your lender.
Attorney fee. While this fee may not always be required, it is a good idea to have an attorney review your mortgage and related documents and contracts.
Property tax. It isn’t out of the ordinary to be asked to pay the first or first two months of your property tax at the time of closing.
Insurance premiums. Flood, fire, and mortgage insurance premiums may all be required to be paid at the time of closing as well.
Home inspection. It’s not a legal obligation to inspect a home before you buy it, but it can save you thousands of dollars in repairs if an issue is discovered after you already sign on a new home.
Origination fee. Not all lenders charge an origination fee, but can expect to pay up to 1% of the value of the home to cover the lender’s administrative expenses.
Transfer tax. This is the tax for when a property changes ownership. Each state and county charge different amounts, with some states charging no transfer tax at all.
Underwriting costs. This is another fee charged by your lender for the work they do to ensure you are safe to lend to.
Where you can save
We know what you’re thinking: that’s a lot of fees. The good news, however, is that you likely won’t end up paying every closing cost there is, and sometimes closing costs are negotiable.
Here’s our advice on how to reduce closing costs.
Shop around. Find a lender that offers a closing cost that you’re comfortable with. Ask the lender for Good Faith Estimate (GFE). The lender is obligated by law to provide a GFE within three business days of applying for a loan.
Negotiate with the lender. Since you haven’t signed on the loan yet, you still have the power to negotiate. For best results, try to negotiate the smaller and more obscure fees; those that aren’t as common with other lenders are more likely to be reduced or removed.
Negotiate with the seller. Some costs may be negotiated with the seller depending on quickly they would like to sell the home. Negotiate things like inspection fees or transfer taxes with the seller. Or, bring up the closing costs with the seller and see if they will reduce the price of the home to accommodate for some of the closing costs.
The process of closing on a home can seem lengthy and complex if it’s your first time buying or selling a house. There are several costs and fees required to close on a home, and while it’s up to the individuals to decide who covers what costs, there are some conventions to follow.
In this article, we’re going to talk about closing costs for selling a house and signing on a mortgage. We’ll discuss who pays what, and whether there is room for negotiation within the various fees and expenses.
But first, let’s talk a little bit about what closing costs are and what to expect when you start the process of buying or selling a home.
Closing costs, simplified
If you’re just now entering the real estate market, the good news is you can often estimate your closing costs based on the value of the property in question. You can ask your real estate agent relatively early on in the process for a ballpark figure of your costs.
Closing costs will vary depending on the circumstances of your sale and the area you live in. In some cases, closing costs can be bundled into your mortgage, such as in “No Closing Cost Mortgages.” However, avoiding having to deal with closing costs often comes at the expense of a slightly higher interest rate.
If you are planning to buy a house and have recently applied for a mortgage, laws require that your lender sends you an estimate of your closing costs within a few days of your application.
Now that we know how closing costs work, let’s take a look at who plays what.
Buyer closing costs
In terms of the sheer number of closing costs, buyers tend to have the most to deal with. Fortunately, your real estate agent will help you navigate these costs and simplify the process.
They can range from two to five percent of the cost of the sale price of the home. However, be sure to check with your lender for the closest estimate of your closing costs. It’s a good idea to shop around for mortgage lenders based on interest rates as well as closing costs charged by the lender.
Here are some of the costs you might be asked to pay as a home buyer:
Prepaid interest or discount points
Home inspection fee
Insurance and Escrow deposits
Seller Closing Costs
While the seller pays a larger amount of closing costs, sellers still have obligations at closing that can be just as expensive. The biggest expense for sellers is to pay the real estate commission. Commission usually falls in the vicinity of 6% of the sale price of the home. This covers the commission of both the seller’s and the buyer’s real estate agents.
The main takeaway? Buyers and sellers both share the burden of closing costs. While the buyer has more expenses to take care of, the seller pays for the largest costs.