Understanding closing costs
When you’re in the process of buying a home, one important consideration is closing costs. These are the fees and expenses associated with the purchase of a property, and they can add up quickly.
Some of the fees that may be included in closing costs include lender fees, property taxes, title insurance, and mortgage insurance. You may also have to pay for an appraisal, a home inspection, and other third-party services. Additionally, you’ll typically need to make a down payment on the property, which can range from 3.5% to 20% of the purchase price depending on the loan program you choose. All of these costs can vary based on your location, the size of the loan, and other factors.
Closing costs: What you need to know
Closing costs are one of the most significant expenses you may face when purchasing a home, and it’s essential to understand what they are and how they work.
- Fees are associated with different parts of the home buying process and may be related to the property, taxes and insurance, or your mortgage.
- Depending on your situation, the closing costs may be the responsibility of the buyer, the seller, or in some cases, both.
- You may be able to take certain actions that will help you to reduce your closing costs.
- It’s important to know how much you can afford and then to add potential mortgage closing costs to that estimate.
What are closing costs on a house?
Closing costs account for all the expenses and fees associated with buying a home. They may be charged by the lender or other third parties for services rendered.
Examples of potential closing costs include:
- Application: The application fee is charged by the lender to process your loan application.
- Origination: The lender charges this fee to process the loan application. It may be paid prior to or at closing by the buyer.
- Inspection: This is the cost charged by a licensed inspector to inspect the property for any issues.
- Appraisal: Charged by the appraiser to determine the value of the home and issue an appraisal report. The appraiser is usually contacted by the lender to perform the appraisal, and these fees are paid by the buyer.
- Survey: The survey fee is charged by a professional surveyor to determine the boundaries of the property.
- Title search: The title search is a fee charged by a title company to search the property title for any existing liens or other potential issues.
- Recording: The recording fee is a fee charged by the county clerk to record the property’s deed and mortgage.
- Brokerage commission: A brokerage commission is a fee charged by a real estate agent for their services in selling the property.
- Home warranty: The home warranty fee is charged by a warranty company to provide coverage for certain home systems and appliances.
- Homeowner’s insurance: Insurance companies charge a fee to provide coverage for the property. This can vary depending on the location of the property and the level of coverage selected.
- Property taxes: Property tax is a fee charged by the county or city. It can vary depending on the location of the property and its assessed value.
- Discount points: These are fees paid to the lender at closing to lower the interest rate on a mortgage. Each point is equal to 1% of the loan amount.
Total closing costs can fluctuate depending on the location of the property, the lender, and other factors. It’s important to review your Loan Estimate and understand all the fees associated with your mortgage.
Fees associated with the lender
The lender is responsible for processing your mortgage application, and they will charge fees for their services. From the list above, this includes:
- Application and origination fees: Charged to cover a lender’s administrative costs associated with processing your loan application.
- Discount points: You may pay discount points upfront to lower your interest rate over the life of the loan.
- Appraisal fees: Lenders require an appraisal to ensure that the property is worth the purchase price.
A lender may also require you to pay for credit report fees when they pull your credit to evaluate your creditworthiness.
Fees associated with the property
There are also fees associated with the property you want to buy, including:
- Title insurance: This insurance protects you and the lender in case there are any issues with the title.
- Title search fee: This fee covers the cost of searching public records to ensure that the property’s title is clear.
- Survey fee: This covers the cost of a professional surveyor evaluating the property’s boundaries.
Fee associated with taxes and insurance
When you buy a home, you’ll also be responsible for pay taxes and insurance. Some of the fees you can expect to pay include:
- Property taxes: These taxes are paid to the local government based on the value of the property.
- Homeowner’s insurance: This insurance protects your home and belongings in case of damage or theft.
- Private mortgage insurance (PMI): If you’re putting down less than 20% of the purchase price, you may be required to pay PMI to protect the lender in case you default on the loan. You can usually request that this fee be removed once you have paid off 20% of your home’s original purchase price.
Finally, there are some other fees you may encounter, including:
- Attorney fees: If you hire an attorney to help you with the closing process, you will need to pay for their services.
- Recording fees: These fees cover the cost of recording the deed and mortgage with the local government.
- Escrow deposit: This is a deposit you can make to your lender to cover property taxes and insurance if you are required to or choose to open an escrow account.
- Notary fees: A notary will charge a fee for their services in certifying that you have signed all of the necessary documents required for closing.
Who pays closing costs – buyers or sellers?
Whether you are buying or selling a home, closing costs may be one of the biggest expenses you will encounter. One of the most common questions people may ask is who pays these costs – the buyer or the seller?
In most cases, both the buyer and the seller will have some closing costs to pay. However, the specific costs and the amount each party is responsible for can vary depending on the terms of the sale and local laws.
Buyer pays closing costs
In some cases, buyers may be responsible for paying all closing costs. This is more common in markets where there is a lot of competition among buyers, and the seller can negotiate a deal where they don’t have to contribute any funds towards closing costs.
You will receive a Loan Estimate when applying for a mortgage, but actual costs will depend on the state and county of your purchase. Prior to closing, you will receive the Closing Disclosure – an important document that provides exact details of the loan and actual closing costs.
If you are a buyer and are responsible for paying closing costs, these will amount to a certain percentage of the overall purchase price of the home. This amount can include fees such as:
- Loan origination fees
- Appraisal fees
- Title insurance
- Attorney fees
- Home inspection fees
- Property taxes
- Recording fees
Where allowed, buyers may request assistance from the seller to cover some costs, but the seller is under no obligation to agree to provide this concession. If a seller does agree to do so, they may counter with a higher selling price. Read all documents, agreements, and contracts carefully before you sign anything. Costs and accountable parties will be spelled out in the paperwork.
Seller pays closing costs
In other cases, the seller may be responsible for paying some or all the closing costs. This is more common in markets where there are fewer buyers, and the seller is trying to attract offers by offering to cover certain costs.
If you are a seller and are responsible for paying closing costs, these fees might include:
- Real estate agent commissions
- Title insurance
- Attorney fees
- Prorated property taxes
- Home warranty fees
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 and reduce the buyer’s out-of-pocket expenses.
There may be limits on how much a seller can contribute to the buyer’s closing costs. These limits can vary by lender and by state, so it’s important to consult with your real estate agent or attorney to understand what the rules are in your area.
Both the buyer and the seller may be responsible for paying closing costs, depending on the terms of the sale. Be sure to ask questions and make sure you understand what your obligations are and budget accordingly to avoid any surprises at closing.
Reducing closing costs
Closing costs can add up to more than you may have expected to pay when trying to buy a home, but there are ways you can try to reduce them and save some money.
- Negotiate with the seller: You may negotiate with the seller to cover some or all closing costs. You can do this by asking the seller to lower the price of the home or by asking them to contribute a certain amount of money towards the overall closing costs.
- Compare lenders: Different lenders have different fees, so it’s important to do your research to learn your options and compare lenders. Try looking for lenders who offer mortgages with no closing costs or who have lower fees.
- Review your Loan Estimate: Your Loan Estimate will list all the fees associated with your mortgage. Review the estimate carefully and ask your lender to explain any fees that you don’t understand. You may be able to negotiate some of these fees.
- Compare title companies: Some title companies may offer discounts on their services if you use them for both the title search and the title insurance. This could save you money on these fees at closing.
What is the Closing Disclosure?
One of the most important documents you will receive during the home buying process is the Closing Disclosure. This document is a summary of the costs associated with your home purchase, and it is designed to help you understand exactly what you are paying for.
The Closing Disclosure is divided into several sections, including:
- The first sections of that provide information about the buyer, seller and lender. It lists the property address, closing date, and selected settlement company. It also details the type of loan being used for the purchase, and provides the amounts due to and from the buyer, with the final amount on the last line.
- The next section lists the amounts due to and from the seller before moving on to the settlement charges. This includes the amount in escrow, title insurance, lender fees and other settlement charges. The Loan Estimate is compared to the costs listed on the document, making it easy to see where there may be differences.
- The final section provides information on the loan you will receive. This includes the loan amount, interest rate, monthly payments, and information about whether this is a fixed or adjustable-rate loan. Here, you can also find out whether there is a balloon payment or prepayment penalty.
Take the time to carefully review this statement with your lender before signing. Ask questions to ensure that you understand all the fees and stipulations. Knowledge and preparation are critical for a smooth, efficient closing with no unwelcome surprises.
Closing thoughts: Paying for your new home
As you approach your closing date, it’s important to understand the costs that are associated with your home purchase. These can vary depending on your location, lender, and mortgage. Here are a few things to keep in mind while you prepare to pay for your new home:
- Make sure you have a clear understanding of the fees associated with your loan. Your lender should provide a Loan Estimate and Closing Disclosure that outline these costs. Review these closely, discuss questions you may have with your lender or real estate agent.
- In addition to lender fees, you will want to budget for other closing costs such as title insurance and any prepaid taxes or insurance.
- One way to potentially reduce your closing costs is to negotiate with the seller to cover some or all of the fees. These seller concessions can lower the amount of cash that you need to have available to close on time.