Home-buying is a complicated and overwhelming process. The last thing you want is to be blindsided by unexpected expenses. This is why understanding and factoring in closing costs is essential for you to categorize them as inevitable expenses rather than unanticipated ones. Ignoring these costs can throw off your entire budget and leave you in a bind. So, let's jump right in and make sure you're ready for whatever those closing costs may throw your way!
What is meant by Closing Costs?
Closing costs are unavoidable expenses that come with buying a house and completing a real estate transaction. These costs can show you that the transfer of property is legal and valid. When closing a house, you pay for various professional services, including attorneys, appraisers, title companies, and others to ensure a smooth home-buying transaction. Without these fees, you could end up with legal issues down the line.
When do you Pay Closing Costs?
Settling the closing costs is the last step in the home-buying process and is generally carried out on the day of closing. However, there are a few charges, such as the home appraisal fee, that are paid before the closing day.
The exact amount of the closing costs is stated in the Closing Disclosure document, which is provided by your lender. The Closing Disclosure will provide a detailed breakdown of all the expenses associated with the transaction, including the closing costs.
Who is Responsible for Paying Closing Costs?
Some of the closing costs are shared by both the buyers and the sellers. However, which party pays for what depends on the specifics of the sale and the property's location. In some cases, the seller may agree to pay for certain closing costs, such as the real estate agent’s commission, to make the property more attractive to buyers. In other cases, the buyer may agree to pay for certain closing costs, such as the title search fee, in order to negotiate a lower purchase price.
In general, it's often the buyer who pays more in closing costs as compared to the seller. This is because many of the fees associated with closing, such as the appraisal and inspection fees, are related to the buyer’s due diligence to ensure the property is in good condition and worth the purchase price.
It’s also important to note that the specific costs and fees associated with closing can vary depending on the location of your property and the terms of the sale. This may even impact the sharing of costs as well. It’s important for both buyers and sellers to work with a professional real estate agent or lawyer who can walk them through the procedure and make sure they are aware of all the costs and fees involved in the transaction.
What Expenses fall under Closing Costs?
A general breakdown of closing costs is as follows:
| Property-Related Fees | Mortgage-Related Fees |
| Appraisal Fee | Credit Report Fee |
| Home Inspection Fee | Origination Fee |
| Title Search | Application Fee |
| Title Insurance | Underwriting Fee |
| Property Taxes | Points |
In addition to the fees mentioned above, there may be additional expenses that you have to pay at closing, such as attorney fees and home inspection fees.
These closing costs are divided (not proportionately) between buyers and sellers and can vary as per different factors, like the home’s location and value.
For a Buyer
Here is a list of closing costs that buyers may have to pay during a closing:
-
Loan Fees
- Application Fee
- Loan Origination Fee
- Discount Points
- Underwriting Fee
- Prepaid Daily Interest Charges
- Private Mortgage Insurance (PMI)
-
Third-Party Fees
- Appraisal Fee
- Credit Reporting Fee
- Flood Certification Fee
- Pest Inspection Fee
- Survey Fee
- Title Search Fees
-
Title Fees
- Lender's Title Insurance
- Owner's Title Insurance
-
Government Fees
- Recording Fee
- Transfer Tax
- VA Funding Fee
- FHA Mortgage Insurance
-
Additional Fees
- Escrow Funds
- Property Tax
- Attorney Fees
- Closing Fee
- Courier Fee
- Homeowners Insurance
- Homeowners Association Transfer Fee
- Lead-Based Paint Inspection
- Rate Lock Fee
- Tax Monitoring And Tax Status Research Fees
Below is a list of closing costs that sellers may have to pay:
-
Agent Fees
- Real Estate Agent Commission
-
Title Fees
- Title Insurance
-
Government Fees
- Recording Fees
- Transfer Taxes
- Prorated Property Taxes
-
Third-Party Fees
- Attorney's Fees
- Escrow Fees
- HOA Fees
-
Credits & Adjustments
- Credits Toward Closing Costs
Why do you Need to Pay Closing Costs?
You may deem closing costs as an extra expense, but they can provide a level of protection for both the buyers and the sellers. Payment of closing costs ensures a smooth transaction and makes the process legal.
Benefits for Buyers
As a buyer, you can benefit in the following ways:
- It can protect you by ensuring that the property has a clear title and that all necessary inspections and appraisals have been completed. You can evade any unpleasant surprises after the sale gets finalized.
- You can negotiate a lower interest rate on your mortgage. By paying points upfront, you can save money over the life of the loan by paying a reduced interest rate.
- In a competitive market, if you would offer to pay closing costs, you may seem to be a serious buyer and get an edge over other buyers.
Benefits for Sellers
The sellers share the advantages too.
- By offering to pay a portion of the closing costs, the sellers can entice interested buyers. This can lead to more interest in the property, more offers, and ultimately a higher sale price.
- By making the process less expensive for the buyer, the seller can reduce the amount of time that the property is on the market.
What Factors can Influence Closing Costs?
You won’t always face the same amount of closing costs, as this expense depends on many factors.
-
The Price of the Home
The home value or price impacts what you are paying as closing costs. For instance, if you are buying an expensive home, you should expect to pay more in closing costs than you would for a cheaper one. This is because some fees, such as title insurance and property taxes, are often a percentage of the home's sale price. -
The Location of the Home
Different states and cities may have different regulations or fees associated with real estate transactions. For example, in some areas, it may be customary for the buyer to pay for certain closing costs, while in other areas, it may be the seller's responsibility. -
New Purchase or Refinance
When refinancing a mortgage, you may not have to pay as many costs as you would when buying a home. This is because some fees, such as title insurance and property taxes, are not required when refinancing.
There is no standard amount of closing costs. Generally, closing costs can be 2% to 5% of the home's asking price. As closing costs are a major expense that you cannot overlook, you can still try and lower these costs or anticipate them to make a budget for them:
-
Contact Various Lenders
You can go for more than one lender to lower your overall closing costs. Don't hesitate to contact different loan providers to compare fees and interest rates. Try to find a mortgage lender that doesn't charge an origination fee or would offer you a discount. Your own bank (if it's the lender) may also give you a discount or a waiver for being a loyal customer. -
Negotiate with your Lender
If you're in a buyer's market, you can negotiate with the seller and ask them to partly cover your closing costs. This can be a win-win situation for both buyers and sellers. The seller can sell the home faster, and you get to save money. However, before asking for a concession, it's important to understand the maximum contribution your seller can make based on your loan type. -
Get Downpayment Assistance
You might be qualified for grants or down payment assistance programs if you're a first-time home buyer, which might help you cover your closing fees. Government agencies, non-profit organizations, and other groups that are dedicated to assisting low-to-moderate-income families with homeownership frequently offer these services. -
Apply No-Closing-Cost Loan
With this type of loan, the closing costs are rolled into the borrowed amount, so you won't have to pay them out of pocket at the time of closing. However, don't forget that the costs are still there, and you will be paying them back with interest over the life of your mortgage.
Usually, closing costs cannot be transferred to a new mortgage. However, if you are refinancing a mortgage, closing costs can be included in the loan amount. Although not all lenders offer this option, it may depend on the type of loan you are getting. If your lender does offer this option, keep in mind that you will end up paying interest on the rolled-in closing costs over the life of the loan. Additionally, rolling closing costs into the loan can increase the amount of your monthly mortgage payment. It's important to consider the pros and cons and discuss this option with your lender before making a decision.
Conclusion
The gist is that you need to understand that closing costs are an essential and major part of the home-buying process. Understanding and knowing how to handle them are the key elements. By knowing what to expect, you can avoid any surprises at the closing table and create a suitable budget for the expenses that come with purchasing a home. However, with so many variables to consider, it's always wise to consult a mortgage or real estate expert, who can help you navigate through the process and make you choose the best options for your specific needs and financial situation.
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