What are closing costs when buying a home?

What are closing costs when buying a house?

Closing costs account for all the expenses associated with buying a home. They may be charged by a lender or third parties like appraisers and title companies for services rendered. Total closing costs may fluctuate depending on different factors.

Closing costs associated with a lender

A lender may charge closing costs for their services when you obtain a mortgage. Some of these costs are listed below:

• Application fee: A fee charged by a lender after a mortgage application is submitted
• Origination fee: A fee charged to process a mortgage
• Credit report fee: A fee charged to pull an applicant's credit file
• Discount points: Paid to a lender at closing to lower the interest rate on a mortgage

Closing costs and fees associated with third parties

When you buy a home, third-party service providers may also charge costs and fees, such as:

• Inspection fee: Charged by a licensed inspector to inspect the property for any issues
• Appraisal fee: Charged by an appraiser to determine the market value of a home
  
• Survey fee: A fee charged by a professional surveyor to determine the boundaries and details of the property
  
• Title search fee: Charged by a title company to confirm property ownership and search the title for any liens or other issues
• Recording fee: Covers the cost of recording documents, such as a deed or mortgage, with the local government
• Attorney fee: Charged by an attorney for their services during a real estate transaction
• Notary fee: Charged by a notary for witnessing the signing of documents, verifying signatures, and other services
• Home warranty fee: Charged by a warranty company to provide coverage for home systems and appliances

Costs and fees associated with taxes and insurance

Some of the potential costs and fees related to taxes and insurance include:

• Property taxes: Paid to the local government based on the value of the property
• Homeowners insurance: Protects a home and its belongings in case of damage or theft
• Escrow deposit: An amount paid at closing to pre-fund an escrow account for property taxes and homeowners insurance
• Private mortgage insurance (PMI): If you take out a conventional home loan with a down payment of less than 20% of the property's purchase price, you may be required to buy PMI, which protects the lender if you stop making payments

Who pays closing costs – buyers or sellers?

A question people may ask is who pays closing costs – the buyer or the seller?

Closing costs for buyers

Common closing costs for buyers include:

• Loan origination fees
• Appraisal fees
• Title insurance (buyer's policy)
• Attorney fees
• Recording fees

If you're obtaining a mortgage, you'll get a Loan Estimate shortly after your lender receives your application that estimates closing costs. Before closing, you'll receive a Closing Disclosure outlining actual closing costs.

Closing costs for sellers

Common closing costs for sellers include:

• Real estate agent commissions
• Title insurance (owner's policy)
• Attorney fees

Seller concessions on closing costs

In some circumstances, the seller may agree to pay a portion of the buyer's closing costs as part of the sale. This is known as a seller concession.

For example, if the buyer is responsible for paying $10,000 in closing costs, the seller may agree to pay $5,000 of those costs, reducing the buyer's expenses.

There may be limits on how much a seller can contribute to a buyer's closing costs. These limits can vary by lender, state, and other factors, so it's important to consult with your real estate agent or attorney to understand what the rules are.

How to reduce closing costs

You may be able to reduce closing costs and fees by:

1. Negotiating with the seller: You can ask the seller to cover some of your closing costs and fees. For example, the seller may agree to pay your appraisal and recording fees.
2. Finding the right lender: Closing costs and fees can vary depending on the lender, so research different options on the market. Try looking for a lender who offers mortgages with low or no closing costs and fees. 
3. Shop around for title services: Title services, including title insurance and a title search, are typically the biggest expense when it comes to closing costs. However, you can shop around for them in most cases.

What is the Closing Disclosure?

One of the most important documents you'll receive when buying a home with a mortgage is the Closing Disclosure. This document is a summary of the actual costs associated with your mortgage, helping you understand exactly what you are responsible for. 

The Closing Disclosure contains different sections across five pages: 

• Page 1 lists information like loan terms, projected payments, and an overview of closing costs.
• Page 2 breaks down the loan costs and other costs you are accountable for.
• Page 3 includes a table called “Calculating Cash to Close” that compares the final cash-to-close transaction with the initial figures on your Loan Estimate, as well as summaries of transactions.
• Page 4 includes various loan disclosures, such as late payment fees associated with the loan.
• Page 5 tells you how much your mortgage will cost over the life of the loan, your annual percentage rate (APR), and other information.

Take time to carefully review your Closing Disclosure before signing it. You may also want to ask your lender questions to ensure you understand all the fees and stipulations. 

Closing thoughts: Paying for your new home

As you approach your closing date, it's important to understand the closing costs and other fees related to your home purchase. These can vary depending on your location, lender, and other factors.

Here are a few things to keep in mind:

1. If you're obtaining a mortgage, make sure you have a clear understanding of the closing costs associated with the loan, as well as other fees. Review your Loan Estimate and Closing Disclosure carefully, and don't be afraid to ask your lender, real estate agent, or attorney any questions you may have.
2. Once you have a better understanding of closing costs and fees, it’s a good idea to budget for these expenses.
3. You may want to negotiate with the seller to cover some of your closing costs. These seller concessions may lower your expenses.