When it comes to saving money for your future home, most people focus on the down payment. But what about closing costs? These additional fees can end up being costly for people who don’t realize they are due when their home closes.
Ensure you plan accordingly by understanding how much those fees will be at every stage of the process, especially if several parties are involved, like co-owners or rental property owners.
Let’s take a look at what you need to know about closing costs when buying a home.
What Are Closing Costs?
Closing costs are fees you pay when purchasing a new home. For many people, a new home also means taking out a new mortgage, which incurs costs of its own.
For instance, title insurance and agent commissions fall into this category. The buyer will pay most closing expenses in the process of buying or refinancing a home. However, sellers may also incur some costs.
Typical examples would be real estate taxes on top of permitting fees that cover local authorities’ application requirements.
How Much Are Closing Costs?
The closing costs vary by lender, and according to recent research, the average closing cost is about 2-5% of the borrowed amount. This amount will vary for several reasons, such as the cost of the home purchased, the amount of the down payment, necessary closing costs, and the legal fees.
How To Calculate Closing Costs?
Closing costs are one of the most overlooked parts of buying a home. The truth is that closing costs can be as high as five percent of your purchase price or $10,000 on a $200,000 home.
While closing costs are subject to change and are determined by many different factors, erring on the side of caution and setting aside enough money will avoid problems when purchasing your home.
What Do Closing Costs Include?
Your lender will itemize all of the fees that are associated with your purchase and loan, but some standard closing costs include:
- Mortgage Fees: This is typically the most significant fee you will incur when purchasing a property, so it is a good idea to shop around. A little bit of time and research could end up saving you thousands.
- Property Taxes: Once the property has been officially transferred into your possession, you will be responsible for the property taxes. However, sometimes sellers have prepaid some of the taxes, which means you will be responsible for paying them back that portion.
- Home Inspection: A home inspection is an essential part of any purchase transaction. While not all states require an inspection before closing, it may be a costly part to skip. A home inspection can tell you critical information about the property and avoid potential disaster scenarios down the road. Inspections will vary in price depending on where you live. However, generally one can expect to pay between $400 – $800.
- Escrow Fees: A lawyer or title company will need to ensure that the purchase meets all state requirements, and this service will come at a cost. Depending on where you live, the purchase price of your home and which lawyer or company you use will determine the fees involved.
- Title Company Search: Before a property can change ownership, a title company will be required to search to ensure no issues with prior ownership.
- Recording Fee: To finalize the transaction, a recording of the purchase will need to be completed. This fee varies depending on the county.
These are just some of the most common fees included in closing costs. Different lenders can consist of other expenses, so contact your lender for details about what’s included in the fee structure of the loan you are considering.
Is It Possible To Have A “No-Closing-Cost” Option?
With a no-closing-cost refinance option, you can avoid paying closing fees on a new mortgage. However, in most cases, this does not save you any money since you still have to pay your monthly payments, and it may even increase the amount of interest you have to pay over time.
An amortization schedule (the schedule that shows the gradual repayment of your debt) shows that switching to a lower rate without closing costs can save you money in total, although you’ll pay more upfront to get the lower rate.
If your goal is to save money each month, no-closing-cost refinancing is not a good choice.
How to Save On Closing Costs
Closing costs are due at the time of loan settlement (when you sign all of your closing documents), so it might not be possible to reduce them, but there are a few things you can do in advance:
- Before deciding, shop around for the best interest rate and know what fees come with each loan so you can compare homes that better match your budget.
- Look into lender credits when you apply for your new loan. Generally, lenders will provide this option only if their interest rates are lower than the rates offered by another lender on an identical loan.
- You should keep track of all fees and charges during the approval process to avoid being blindsided at closing. A good idea is to keep your receipts to compare them with what’s listed in your final disclosures.-Many time’s lenders use different terminology than what was discussed, which could result in some surprises at signing!
- Complete the month’s closing at the end of the month. Lenders might be able to provide you with a better deal at the end of the month when they process billing statements.
- Review the loan estimate and disclosure forms. Although they might say the same thing, lenders can add hidden fees to this document, so make sure you review them thoroughly beforehand. Ask your lender for an explanation if there are any points that you are unclear about before signing.
Closing costs will always accompany a new home purchase. Closing costs cannot be avoided, but you can reduce them by shopping around and refusing to settle on a loan until you have a complete handle on them.
Once the deal is finalized, focus on reducing closing costs as much as possible. This will ensure you come out ahead financially on the closing day!
About the author: The above article on what to know about closing costs was written by Aaron Mears. Aaron is the writer and editor of House Stories. He loves to write stories on everything related to homes. Since earning his business degree from Western University, he has spent half a decade writing on Real Estate, home improvements, and business concerns.