If you’re buying a home, your mortgage down payment isn’t the only check you’ll be writing on the day you close your loan. Just about every first-time buyer has heard of the term closing costs, and have a general idea of what it means. However, while buyers do know about this standard cost, they usually are surprised when they learn about the details of expenses. So, what exactly are closing costs?
Put simply, closing costs are expenses over and above the price of the property in a real estate transaction. Closing costs occur when the title of property is transferred from the seller to the buyer, and may be paid by either party. The total dollar amount of closing costs depends on where the property is being sold and the value of the property being transferred. Homebuyers typically pay between two to five-percent of the purchase price. The most common closing cost is the down payment. Average closing costs can climb from $4,000-$10,000 which is a lot of money when you consider this is paid upfront at closing. In addition to making your down payment, there are other costs and fees associated with your home purchase.
Closing costs include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Prepaid costs are recurring, such as property taxes and homeowners’ insurance, and the lender states these costs in a good faith estimate, within 3 days of the mortgage loan application.
Origination fees are also charged by the lender for the creation of a loan. Usually, they amount to one-percent of the mortgage. The buyer can purchase discount points up front to reduce the interest rate charged by the bank. Although the bank requires a credit report and loan application, these fees are generally negotiable and can be covered by the lending institution. Private mortgage insurance is an additional fee applied to any purchase with a down payment less than twenty-percent.
Title insurance protects the lender from claims against the house, and protects the buyer from past contractors making claims against the property. Lenders often require an appraisal; the fees differ by state, and usually run a few hundred dollars. Local governments charge recording fees and taxes to record the sale of property. Like appraisals, transfer taxes vary depending on location.
When it comes to closing costs, always remember that you actually can reduce the amount you pay at closing by requesting the seller to cover specific closing fees. One way is to offer the full purchase price on the home with the stipulation that the seller pays the costs associated with closing. Most sellers expect homebuyers to offer less than the listing price on their home. A seller will be much more open to negotiate when facing an offer of the full asking price. Another option is to meet the seller halfway, dividing the closing costs between both parties.
Some fees you can expect to pay are:
- A loan origination fee, which lenders charge for processing the paperwork for your loan.
- A fee for running your credit report.
- A fee for the underwriter, who assesses your credit worthiness.
- A fee for the appraisal of the home you hope to own to make sure its value matches the size of the loan you want.
- A fee for the home inspection, which checks the home for potential problems from cracks in the foundation to a leaky roof.
- A fee for a title search to unearth any liens on the property that could interfere with your ownership of it.
- A survey fee if it’s a single-family home or town house.
- Taxes on the money you’ve borrowed for your home loan.
Also, if you are refinancing, you may be able to cut the appraisal fee if your home has been appraised recently. If this is the case, ask your lender for an appraisal waiver. You can also save on your title insurance by asking for a cheaper rate when you refinance. If you’re getting down on all the fees you’ll have to pay, don’t forget that sellers aren’t off the hook. Like you, they have to pay closing costs too. Sellers are responsible for:
- A closing fee, paid to the title company or attorney’s office where everyone meets to close on the home.
- Taxes on the home sale.
- A fee for an attorney, if the home seller has one.
- A fee for transferring the title to the new owner.
Before you close, make sure to review all documents to see if the numbers line up to what you were originally quoted. Errors happen frequently, and you’ll be glad to have piece of mind knowing that you reduced them as much as you could, and didn’t pay extra due to any contract mistakes.