Closing Costs for Homebuyers: What to Expect
Buying a home can sometimes be demanding. You saved your down payment, approached a lender to secure a mortgage loan, and finally located the right home to buy. That’s incredible – good for you! However, you may be surprised (especially if you’re a first-time buyer) to learn that you will have to pay some other costs before finally getting the house keys. These charges are what we call closing costs or settlement costs. (Still need to find a home, get a loan or need an agent?)
Therefore, prior planning and budgeting for all the costs involved in home procurement are vital. This ensures a smooth homebuying process from start to end while averting the stress of seeking financing to close your purchase hastily.
In this post, we’ll explore what closing costs are, what they cover, and how much you are expected to pay as a homebuyer.
What Are Closing Costs?
Different people are involved throughout the homebuying process, such as real estate attorneys, local government and other third parties. In some cases, there are also associated license or certification fees involved. Closing costs include taxes, fees paid to professionals and charges for services offered to finalize your home purchase. These costs apply whether you’re buying or refinancing a home.
What Fees Do I Need to Pay?
Closing costs can be related to your property, loan, or mortgage insurance but there are a few fees along the way prior to closing that we’ll include here for you as well. The most common ones that you will be expected to pay for include the following:
- Application fee — This is a fee charged by the lender to process your loan application, which involves checking credit scores and other administrative duties. The price varies depending on the lender. Consider negotiating beforehand and this one will typically be early in the process.
- Attorney fees — Depending on the state the property is in, an attorney is required at the closing and you’ll have to pay their fee.
- Loan origination fee — The mortgage lender charges this for the whole process of preparing your loan. You can expect dues of about 0.5% to 1% of the total amount of money you’re borrowing.
- Prepaid interests — Some mortgage loan lenders will require the interest that accrues between the settlement date and first-month installment due date to be paid before closing.
- Mortgage agent fee — If you are working with a mortgage broker to secure you the loan, then expect to pay them a commission ranging from 0.5% to 2.75% of the home purchase value.
- Home inspection fee — Before approving your loan, a lender will require the prospect home to be inspected to ascertain that it meets safety and livability standards. This fee occurs early in the homebuying process. This is mandatory for government-insured loans such as VA loans and FHA loans. The fee is approximately $400 to $500 for most purchases.
- Appraisal fee — Homebuyers are expected to ascertain that homes they are buying meet the fair market prices. Since you can’t do this personally, an appraisal company is ordered by the lender and paid by you to confirm the home value. Similar to home inspections, this fee is typically earlier in the home buying process.
- Insurance fees — Except for VA loans, other mortgages will require you to get Private Mortgage Insurance (PMI), particularly if the down payment is less than 20%. The additional insurance involved is the Mortgage Insurance Premium (MIP). Depending on the lender, you can either pay upfront for one year or the whole sum of MIP at closing. Again, VA-backed loans are exempted from MIP. You’ll also need a homeowner’s insurance policy, you’ll be free to shop around to choose your insurer.
- Title fees — To establish that the person selling the property actually owns it and that there are no outstanding claims against the property, title-search fees are paid. Other title-related bills may include the lender’s title and owner’s title insurance covers.
- Taxes and recording fees — Other dues include but are not limited to pre-payment of a certain number of months worth of property taxes, town/county recording fees, and state/local transfer taxes.
The Total Amount to Pay at Closing
Knowing the estimated total amount you are expected to pay can help you budget ahead. The determinants here are factors such as the lender, type of mortgage, and geographical location. On average, settlement costs can be as low as 2% and sometimes as high as 5% of the home purchase price. For example, for a mortgage of $400,000, the total costs at closing can fall between $8,000 and $20,000.
Instead of accumulating your closing costs in the loan, it would be more economical to pay them out-of-pocket, hence saving you interest. Also, check out if you can negotiate some fees to lower the expenses.
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