You will soon come to learn that buying a home costs more money out of pocket than you may have originally anticipated. In addition to the down payment that is required to purchase a home, you must also be able to afford your closing costs at the time of sale. The price of typical home closing costs often surprises many buyers. Not to worry though. You will soon be an expert in deciphering closing costs, and you may even be able to save a good chunk of money with your newfound knowledge.
What are Closing Costs?
Closing costs include an abundance of fees associated with your real estate transaction. These fees are paid at the official closing of your transaction, hence the name. The official closing happens when the title of the property is transferred from the seller to the buyer. Your lender is required by law to give you a good faith estimate, or formally known as a loan estimate, of these costs within three days of you submitting your home loan application. So you shouldn’t be completely in the dark when it comes time to pay these costs. Your lender can only give you an estimate though, so make sure you plan ahead in case your closing costs add up to more than you expected.
Before your transaction can officially close, you and the seller must agree on, and approve how the closing costs are handled. Both buyers and sellers can be subject to closing costs. It is all about how the two of you, along with your real estate agents, have negotiated these costs. In some cases buyers and sellers have split the closing costs, in others one party takes on the full sum.
How Much You Should Expect to Pay in Closing Costs
The standard rule of thumb is that you should expect to pay between 2% and 4% for typical home closing costs. Therefore, the average closing costs for a home costing $250,000 would be between $5,000 and $10,000. Many fees included in closing costs though are unnecessary, or are solely high administrative fees charged by your lender. So shop around for a lender who you feel offers fair terms. Don’t simply settle for the first lender you find.
At least three days before your closing your lender should send you a closing disclosure that outlines all your final closing fees. Review and compare this disclosure to the loan estimate you received after you first applied for the loan. If there are any significant increases speak with your lender and have them explain exactly what they are for, and why they were added.
Fees Included in Typical Home Closing Costs
There are numerous individual fees that are compiled into your closing costs. Below we have briefly explained only the most common fees you can expect to find when reviewing your closing costs. The state you live in can drastically affect the fees you pay, as well as how much those fees are. So make sure to consult with your real estate agent, and ensure you are prepared for all the closing costs that are required of your specific transaction.
Mortgage Origination Fees
Loan origination fees are charged by your bank in order to create your loan. These fees may be negotiable though depending on the risk level of the loan, and your credit score. In some cases this fee may not be charged at all depending on your bank. It also has the possibility to be negotiated away depending on your specific situation.
An appraisal fee is the price you pay in order for an appraiser to verify the value of the property you wish to buy. Many lenders require a professional appraiser to assess any property they are lending for. Even if your lender doesn’t though, it is a good idea to invest in one. Utilizing this service ensures that you are getting a fair market price for the property you intend to buy.
Title insurance protects you against losses resulting from defects in the title due to the previous owners. Defects would include liens, outstanding taxes, mortgage payments, or any other violations. Paying for this insurance is typically required by all lenders. On the bright side: it is only a one time payment.
Real Estate Agent Fees
Assuming the seller used a listing agent to sell their home, the agent fees are usually the responsibility of the seller. This is not true for all cases though, remember everything is up for negotiation. Nevertheless, generally agent commission fees will fall between 2% and 6% of the property’s final sale price, and the seller can expect to pay that bill at closing.
Prepaid costs are required by your lender, and are paid in advance when getting a loan. These costs can vary, but typically they include things like property taxes, or homeowners insurance. All the costs falling under this category should be explicitly listed out in your loan estimate and closing disclosure.
Private Mortgage Insurance
Private Mortgage Insurance is applied to any home purchase using a conventional loan with a down payment less than 20%. This insurance protects the lender from losing any money if you end up in foreclosure. The cost of this insurance depends on how much you were able to put down, and your credit score.
Recording Fees and Taxes
Local and state governments charge different fees and taxes to record and recognize your transaction. For example, New York charges $2 for every $500 in value of your property.
How You Can Reduce Closing Costs
Negotiation will be your best bet if you are attempting to reduce your closing costs. Attempt to negotiate with the seller. You may be able to set up a deal where they pay a percentage of the closing costs that apply to them as well. Or if you get lucky you could negotiate a slightly lower price of the house, as to include a portion of the closing costs.
It is also a good idea to go through your closing costs with your lender. Have them explain every fee as to ensure you don’t have any duplicate or “junk” fees. If you do, ask for them to be removed before closing is completed. As stated previously, it is also a good idea to shop around for a lender. Gather recommendations, referrals, and research on different mortgage companies, and determine which company’s terms will be the most beneficial to you.