How Much Are Closing Costs
Whether you are buying a home or selling, closing costs are going to be a part of the transaction. It's important to understand what closing costs are and how much you'll be expected to shell out to seal the deal.
Closing costs not only affect the buyer but the seller as well. Both parties need to understand the costs associated with selling or purchasing a home. The seller has likely already put money into their home to update, maintain and/or repair their home to go on the market, so a clear understanding of the additional costs associated with selling their home is important. Deciding to purchase a new home takes a lot of planning and budgeting to ensure you can afford the home you're purchasing; you don't want the costs associated with the closing to derail your purchase.
Closing Costs Defined
The term closing costs is used to describe all of the fees or charges for actions or items related to originating and closing on your mortgage. For example, fees due to the title company, mortgage lender fees (underwriting, document preparation), appraisal, credit reports, etc. Anyone involved in your loan needs to get paid and that happens through the closing costs.
Some mortgage lenders will require buyers to prepay for some of the anticipated fees. What are Prepaids? A lender may request or require a buyer to pay for items, usually related to real estate taxes. Common prepaids are mortgage interest, real estate taxes, homeowner's insurance, hazard insurance, private mortgage insurance, and any special assessments are the most common items included in prepaids.
The prepaids collected are placed in an escrow account that is created by your lender, this allows them to have your account ready for future deposits and disbursements before your first payment is made. The amount collected at closing along with the monthly payments combines will be sufficient to pay the taxes and insurance when they become due.
Generally, closing costs fall on the buyer, however, closing costs also apply to the seller, although it is usually less than the buyers, seller's fees would include items such as the real estate agent's commission.
The seller could also end up with some concessions that they are responsible for at the time of closing. What are concessions? Concessions are items that the seller agrees to pay to sweeten the deal and close the sale. A common concession would be for the seller to pay some or even most of the buyer's closing costs. Another common concession is if something in the home needs repair, the buyer could offer a credit at closing instead of completing the repair or replacement.
What is Included in Closing Costs?
Closing costs are an accumulation of various fees all wrapped into one, giving a breakdown of each item that could be included in your closing costs will not only help you understand what you are paying for but, will also give you more power to negotiate. You read that right, negotiate.
When buying a home, you can learn what to expect for closing costs in multiple ways. A buyer can request a Loan Estimate when they are getting prequalified for a mortgage loan. This estimate will be a more general estimate but, still accurate as it is based on a pre-approved amount and not the actual home the buyer is intending to buy.
The second time they will receive a revised Loan Estimate is when they find a home and are under contract. This loan estimate is the one that they will sign, acknowledging they agree to the estimated loan amount. This loan estimate is the baseline for tolerances. What are tolerances? Tolerances are how much wiggle room you have if something in your budget should go awry, how much you can afford.
Finally, at least three days before you close on your home, you will receive from your lender their closing disclosures for review. The closing disclosures are what you will want to compare to your revised Loan Estimate when you were going under contract.
What is included in the closing costs? Let's try to break it down.
Appraisal Fee - The lender will require an appraisal on the property to ensure that the property is worth as much as you are asking to borrow. Appraisals usually range in cost between $300 - $400. The buyer is most often responsible for the appraisal fee unless it is a part of the concessions that the seller agrees to pay for it.
Home Inspection - Most lenders will require a home inspection to be completed, especially government-backed mortgages. The average cost for a home inspection is between $300 - $500 and is most often the responsibility of the buyer.
Application Fee - The application fee varies in price depending on the lender and the amount of work is put into processing your application. The buyer could try to negotiate this fee with the lender.
Assumption Fee - If the seller has an assumable mortgage and you take over the remaining balance of the loan, there may be a variable fee based on the balance.
Attorney's Fee - A real estate attorney is required to be present at closing in some states. Their fee will vary depending on the attorney's hourly rate.
Prepaid Interest - Lenders will often require buyers to pay the interest that accrues on the mortgage between the closing date and the first monthly payment. This amount is included in the buyer's closing costs; the amount will vary depending on the size of the loan.
Loan Origination Fee - Commonly known as an underwriting fee, processing fee, or administrative fee. This is the amount that the lender charges for evaluating and preparing the mortgage; it covers the document preparation, lender's attorney's fees, notary, and more. Generally, the loan origination fee is around 0.05% of the amount you are borrowing.
Discount Points - Buyers that are planning on remaining in their home long term may consider purchasing discount points, this will reduce the interest over the life of the loan. The cost of discount points is 1% of the loan amount; it is non-negotiable.
Mortgage Broker Fees - Some buyers will choose to work with a mortgage broker to find a loan, they will charge a commission for finding you a loan. Brokers usually charge a percentage of the loan amount for their commission ranging anywhere from 0.5% - to 2.75% of the purchase price. This fee is negotiable.
Mortgage Insurance Fees
Mortgage Insurance - Paying the mortgage insurance premium in advance is not an uncommon requirement of a lender. While it is more common than the lender requires the first year's insurance premium in advance, some will require a lump-sum payment that covers the life of the loan. Buyers can expect to pay anywhere from 0.55% - to 2.25% of the purchase price for the mortgage insurance.
FHA, VA, and USDA Fees - Loans that are insured by the Federal Housing Administration require the buyer to pay FHA mortgage insurance premiums. FHA loans require an additional premium payment of 1.75% of the loan amount in addition to the monthly premiums. Guarantee fees are required for loans that are guaranteed by the Department of Veteran Affairs or the U.S. Department of Agriculture. USDA loans require an upfront guarantee fee of 1% and a VA loan will require a guarantee fee ranging from 1.25% to 3.3% of the loan amount; the percentage is usually determined by the amount of the buyer's down payment.
Taxes, Annual Fees and Insurance
Property Tax - At closing, buyers are typically required to pay two months' worth of city and county property taxes.
Annual Assessments - If you purchase a home that has a homeowner's association that requires an annual fee, you may be required to pay this upfront at closing.
Homeowners Insurance Premium - Lenders usually require you to purchase homeowners' insurance before closing.
Title Search Fee - Title search fees are usually around $200 but can vary depending on the title company. This is a labor-extensive search to ensure that the seller owns the property and that there are no liens against the property.
Lender's Title Insurance - Lenders want to protect themselves in case there is an error in the title search, and someone claims the property. Most lenders will require title insurance and it does last through the life of the loan.
Owner's Title Insurance - The owner's title insurance lasts as long as you and/or your heirs own the property. The cost of owner's insurance is between 0.5% - 1% of the purchase price. Depending on the region, the buyer or seller could be responsible for the purchase of the owner's title insurance. It's important to mention that a discount is sometimes offered if both the lender's and owner's policies are purchased at the same time.
Typical closing costs average between 2% to 5% of the loan cost, this would include property taxes, mortgage insurance, and so much more. While the list of fees above represents most of the standard closing costs, they can vary. Some of the fees above may not apply to your closing or there could be additional costs specific to your loan or property. For example, your lender may require a survey to be completed on the property before closing.
It is important that your lender is clear and as accurate as possible with your loan estimate. No one wants any major surprise costs to suddenly appear and it's important to understand what you are paying for at closing. Make sure to take the time to thoroughly read through the loan estimate and then the closing disclosure from your lender before signing on the dotted line.