The term "closing costs" includes a variety of expenses above the purchase price of your property, such as fees for an attorney, a title search, title insurance, taxes, lender costs and some upfront housing expenses such as homeowners insurance. Some
of those costs are nonnegotiable, such as recording or transfer taxes charged by your state or local government. Others, such as your lender's fee, can be negotiated.
Whether you're a first-time homebuyer of have bought and sold multiple homes, you need to budget for closing costs at the same time you're trying to put down the largest possible down payment.
What Are Closing Costs on a New Home and How Much Will They Cost?
When you complete the purchase of a new home, you will not only have to fund a down payment and
the monthly mortgage payment. You will also be asked to pay for the closing costs of the deal. Closing Costs include fees for services and expenses required to finalize a mortgage. Closing Costs are paid whether you're buying or refinancing a home.
In their simplest form, Closing Costs are fees in a real estate transaction upon transfer of ownership of the property.
Who pays closing costs?
Both buyers and sellers have expenses to pay at the settlement table, but what they pay depends on negotiations between buyers and
Most of the closing costs fall on the buyer, but the seller typically has to pay a few, too, such as the real estate agent’s commission.
What fees can you expect at closing?
There is no set amount of 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 are as follows:
Loan Origination Fee (also known as an underwriting fee, administration fee, or processing fee)
Homeowners association transfer fee
Title search fee
How much are closing costs?
Recent surveys suggest that closing costs range between 2% and 5% of the purchasing price
of the property.
That means on a $200,000 home purchase, the homebuyer would pay from $4,000 to $10,000 in Closing Costs. This is in Addition to the Down Payment.
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
When are closing costs due?
Closing Costs are due when you sign your final loan papers (Closing Day). For Buyers, the Down Payment will likely be due at this time. For Sellers, the commissions you pay will be deducted from your proceeds
from the sale.
Strategies for Lowering Your Closing Costs
You're not likely to avoid paying closing costs entirely. While some costs such as transfer taxes and property taxes can't be changed, there are several ways to lower your out-of-pocket expenses at the
- Compare lenders' 'Loan Estimates' - The Loan Estimate lets you comparison shop between companies' total costs and also dig into specific fees once you've
chosen a lender.
- Ask your Bank for Discounts and Rebates - Some banks offer existing customers incentives on their mortgages.
- Ask the Seller to Contribute - Depending on the market and the home, a seller might contribute money toward your closing costs. However, inventories are low
in many places these days, and buyers are competing aggressively, so sellers don’t make many concessions.
- Sign Loan Papers near the End of the Month - Reduce your cash outlay at closing for prepaid or “per diem” interest for the period between your loan closing
and the start of the new month. How much can you save? Find out: Multiply your loan amount by your interest rate — for instance, 4% = .04 — to find your annual interest charge. Dividing that by 365 gives the daily interest charge. Now, multiply
that figure by the days left in the month to see the savings.
The Bottom Line
Understanding what closing costs cover and budgeting for them will smooth out the final stretch of the home-buying process.