Understanding Closing Costs: What’s Included?

New home buyers are sometimes taken by surprise by closing costs, but they can range from 2% to 5% of the home’s purchase price, so you do need to plan for them. What exactly are closing costs, and how much will they be? Who pays these costs? Are they negotiable?

If these questions have crossed your mind, you can find answers here! We will go through the details of closing costs and help you figure out what your total closing costs might be.

What Are Closing Costs?

Closing costs are expenses that are paid during the final step of the home-buying process. After that, your home ownership expenses are a bit steadier and more predictable! Closing costs include a wide variety of fees and charges, as detailed below. They must be disclosed to you by your lender as part of your loan estimate before the deal closes.

If you do not receive a breakdown of your closing costs, check with your lender. Once you have the list, review it carefully and ask questions if you do not understand an item.

Breakdown of Common Closing Costs

Here are the main closing costs you can expect:

Lender Fees

These costs vary by lender, but here are some typical charges:

• Loan origination fee: Covers your lender’s administrative costs.
• Application fee: Fee for processing a mortgage application.
• Credit report fee: Covers the lender’s cost of pulling your credit report

Property-Related Costs

• Appraisal fee: Ensures that your home’s value is at least the amount of the mortgage loan.
• Home inspection fee: This is not necessarily needed, but it is money well spent. A home inspection is highly recommended before you sign a purchase agreement.

Title and Legal Fees

• Title search: Confirms there are no outstanding liens (claims) on the property. The search is normally arranged by your lender and is conducted by a title search company or real estate lawyer.
• Title insurance: Protects both you and the lender from title disputes, which could arise from unknown liens, clerical errors, fraud or forgery, undisclosed errors, an easement or restrictions that were not disclosed initially.
• Attorney fees: To review your closing documents.

Government & Administrative Costs

• Recording fees: Pays for official recording of the transfer of title.
• Transfer taxes: Not applicable in all states. Basically, it’s a tax on land transfer.

Prepaid Expenses

These expenses will continue, but some of them have to be prepaid as part of your closing costs.

• Property taxes: Several months may be required up front, but this depends on the lender.
• Homeowner’s insurance: Initial payments have to be made before closing.
• Mortgage interest: You will have to prepay the interest on your mortgage from the closing date until your first regular mortgage payment.

How Much Are Closing Costs?

This table indicates the amounts you can expect to spend on closing costs:

Can You Reduce Your Closing Costs?

It may be possible to reduce your closing costs. Here are some tips:

• Shop around for lenders: You may be able to find a lender with lower closing cost options.
• Ask for discounts: Your lender may be willing to offer you discounts on some of your closing costs, especially if they want to attract your business for other products such as credit cards or additional bank accounts.
• Negotiate with the seller: The seller may be willing to pay some of the closing costs. This negotiation can be part of the price negotiation process.
• Consider a no-closing-cost mortgage, but be aware that this can mean higher interest rates. Do a quick calculation to see if this actually saves you money.
• Look for a down payment assistance program. These are usually geared toward first-time home buyers and vary by state and county. You can look for down payment assistance via your state’s Housing Finance Agency (HFA), your city or county website, the US Department of Housing and Urban Development (HUD), or your lender.

Be sure to ask your lender for a breakdown of the fees so you can see if any of them are unnecessary or negotiable. Do not be afraid to ask questions about anything you do not understand.

Who Pays Closing Costs?

Typically, the buyer pays lender-related closing fees and property fees, while sellers often covers transfer taxes. However, some of this can depend on whether you are in a buyer’s market or a seller’s market, which can leave some room for negotiation.

How to Prepare for Closing Costs

It is advisable to start saving early for your closing costs. They can add up to quite a bit, and you do not want to be scrambling for cash as the deal is closing. Be sure to carefully review your loan estimate for anything unexpected or anything you may be able to negotiate on.

Some lenders will allow you to roll closing costs into the mortgage, but they will likely charge a higher rate of interest for this. In most cases, it is better to pay your closing costs upfront.

To make sure your deal goes through without a hitch, avoid common mistakes like making major changes to your financial status. Avoid large purchases, new credit cards and new debt of any kind, and do not change jobs.

Closing costs are a normal part of buying a house, but they are often overlooked. In general, they range from 2% to 5% of the home price, but can sometimes be reduced. Before you make an offer on a house, talk to your lender about what you can expect to help you budget properly.

Be sure to use a qualified REMAX agent as a trusted source of information related to buying a house. They can serve as an invaluable resource in your home-buying journey!