When buying a home, your financial obligation includes more than just the down payment and monthly mortgage. You’ll also be on the hook for the costs required just to close the deal, or Closing Costs. In their simplest form, closing costs are all the fees a buyer incurs in a real estate transaction just before ownership of the property is transferred.
What fees can you expect at closing?
There is no set or standard amount for fees to be paid at closing as they differ based on where you live, the type of property you’ve bought, and what loan you got from the bank. Some of the services that you can expect to pay for include:
- Application fee – The cost for the lender to process your application.
- Attorney fee – This pays for an attorney to review the closing documents on behalf of the buyer or the lender.
- Closing fee – This is paid to the title company, escrow company or attorney for conducting the closing.
- Title Search – This fee is paid to the title company for doing a thorough search of the property’s records, ensuring that no one else has a claim to the property.
- Origination Fee – This fee covers the lender’s administration costs. It’s usually about 1 percent of the total loan but you can sometimes find mortgages with no origination fee.
- Credit Report – A credit report is pulled to get your full credit history and score. Your credit score plays a big role in determining the interest rate you’ll get on your loan.
- Underwriting Fee – This fee is paid to the lender, covering the cost of researching whether or not to approve you for the loan.
- Loan Discount Points – This does not apply to all. “Points” are prepaid interest. One point is equal to one percent of your loan amount. This is a lump sum payment that lowers your monthly payment for the life of your loan.
- Prepaid Interest – Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.
- Property tax – Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer to be paid at closing.
- Transfer tax – This is the tax paid when the title passes from the seller to the buyer.
- Recording Fees – A fee charged by your local recording office, usually city or county, for the recording of public land records.
- Homeowners’ Insurance – This covers possible damage to your home. Your first year’s insurance is often paid at closing.
How much are closing costs?
Recent surveys suggest that closing costs range between 2% and 5% of the purchasing price of the property, with the average being around 3% of the sales price. The lending institution notes the closing costs in a loan estimate, gives you a copy of the document, and then confirms the fees in a closing disclosure statement. It is important that you understand all of the costs involved, and it is up to you to make sure that the numbers in the loan estimate match those in the closing disclosure statement.
How can home buyers avoid closing costs?
Typically, the funds needed for closing costs cannot be borrowed. There are a few ways home buyers can avoid paying excessive closing costs. One way is by negotiating with the seller on who will pay what fees. Sometimes, a motivated seller will agree to cover some of the costs of closing, just to ease the deal. Another way is to get a no-closing-cost mortgage. This might seem like an easy way to avoid closing costs, but inflated interest rates may have you paying more money in the long run than if you were to pay the closing costs upfront. It all comes down to communication between the buyer and the seller, and their ability to negotiate the best prices.
Just another reason it really makes a difference to have an experienced REALTOR® going to bat for you!