It’s an important part of ever Real Estate transaction, but what are they for? Why doesn’t my cash back at closing cover everything? How much do they cost? Hopefully after reading this you will understand them a little more and why we have them.
What are closing costs?
Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. Closing costs are incurred by either the buyer or seller.
Closing costs vary widely based on where you live, the property you buy, and the type of loan you choose. Here is a list of fees that may be included in closing. The list is inclusive of fees you may see, but it’s not likely that your loan will include all of the fees listed here.
- Application Fee
- Attorney Fee
- Closing Fee or Escrow Fee
- Courier Fee
- Credit Report
- Escrow Deposit for Property Taxes & Mortgage Insurance
- FHA Up-Front Mortgage Insurance Premium (UPMIP)
- Flood Determination or Life of Loan Coverage
- Home Inspection
- Home Owners Association Transfer Fees
- Homeowners’ Insurance
- Lender’s Policy Title Insurance
- Lead-Based Paint Inspection
- Loan Discount Points
- Owner’s Policy Title Insurance
- Origination Fee
- Pest Inspection
- Prepaid Interest
- Private Mortgage Insurance (PMI)
- Property Tax
- Recording Fees
- Survey Fee
- Title Company Title Search or Exam Fee
- Transfer Taxes
- Underwriting Fee
- VA Funding Fee
How much are closing costs?
Typically, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees.
Your lender will give you a Loan Estimate for your loan, which will include what the closing costs on your home will be, within three business days of receiving your completed loan application. But these are just an estimate, and many of the fees listed can change. If they do change, you may receive a revised Loan Estimate so there are no surprises along the way.
Often, many of the fees that make up closing costs are negotiable, and some are completely unnecessary, especially things such as high administrative, mailing or courier costs charged by your lender. Remember that you can shop around and you may be able to find other lenders who are willing to offer you a loan with lower fees at closing.
At least three business days before your closing, the lender should give you Closing Disclosure statement, which outlines closing fees. Compare this to your Loan Estimate and ask the lender to explain what each line item on your closing costs is and why it is needed. There are limitations on the amount a number of fees can increase from the Loan Estimate to the Closing Disclosure so there really shouldn’t be any surprises on closing day. But if there are, you can still walk away at closing.
How can home buyers avoid closing costs?
Some banks allow you to avoid upfront fees on your loan by getting a no-closing cost mortgage, in which you don’t pay any of the closing costs when you close on the mortgage.
Typically, when a lender offers a deal like this, it does end up costing you in the long run: The lender may charge you a higher interest rate on the loan for not paying closing costs, or the lender may wrap the closing fees into the total mortgage owed, in which case you end up paying interest on the closing costs.
commonly, home buyers can negotiate with the seller over who pays these
fees. Sometimes the seller will agree to assume the buyer’s closing
fees in exchange for a higher offer price.
As with everything, as a professional before making a decision. There are programs that assist buyers with closing cost. Ask your Realtor (or myself) if there are any in your area that you might qualify for.