What are Closing Costs?
Closing costs are the fees paid at the closing of a real estate transaction. This point in time, called the closing, is when the title to the property is conveyed (transferred) to the buyer. Closing costs are either incurred by the buyer or the seller.
How Much are Closing Costs?
Ultimately, closing costs vary, largely depending on the location. A recent Investopedia article states that on average, a home buyer will pay approximately 2 to 5% of the purchase price of the home in closing fees. For example; if you were to purchase a home for, say, $120,000, you will end up paying anywhere from $2,400 to $6,000 in closing fees. According to a recent survey, a typical home buyer's closing cost will be an average of $3,700.
Regardless, statistics are just statistics, which means not everyone will precisely fit into those numbers. A homebuyer has the freedom to shop around and potentially find other lenders whom are willing to offer a loan with lower fees at closing. So, don't automatically settle with the first lender you encounter. Take the time to, if possible, do your research, compare and negotiate.
What do They Consist of?
While paying for something, especially if it is a large quantity, who doesn't like to know where their money is going? Although it typically will not include every one of them, a Zillow article breaks it down and below is a list of some of the fees that will/may make up the closing cost:
- Application Fee: This fee covers the cost for the lender to process your application. Before submitting an application, ask your lender what this fee covers. It can often include things like a credit check for your credit score or appraisal as well. Not all lenders charge an application fee, and it can often be negotiated.
- Appraisal: This is paid to the appraisal company to confirm the fair market value of the home.
- Attorney Fee: This pays for an attorney to review the closing documents on behalf of the buyer or the lender. This is not required in all states.
- Courier Fee: This covers the cost of transporting documents to complete the loan transaction as quickly as possible.
- Credit Report: A Tri-merge credit report is pulled to get your credit history and score. Your credit score plays a big role in determining the interest rate you'll get on your loan.
- Escrow Deposit for Property Taxes & Mortgage Insurance: Often you are asked to put down two months of property tax and mortgage insurance payments at closing.
- FHA Up-Front Mortgage Insurance Premium (UPMIP): If you have an FHA loan, you'll be required to pay the UPMIP of 1.75% of the base loan amount. You are also able to roll this into the cost of the loan if you prefer.
- Home Inspection: You will likely get your own home inspection to verify the condition of a property and to check for home repairs that may be needed before closing.
- Homeowners’ Insurance: This covers possible damages to your home. Your first year's insurance is often paid at closing.
- Lender’s Policy Title Insurance: This is insurance to assure the lender that you own the home and the lender's mortgage is a valid lien, and it protects the lender if there is a problem with the title. Similar to the title search, but always a separate line item.
- Origination Fee: This covers the lender's administrative costs. It's usually about 1 percent of the total loan but you can sometimes find mortgages with no origination fee.
- Pest Inspection: This fee covers the cost to inspect for termites or dry rot, which is required in some states and required for government loans. Repairs can get expensive if evidence of termites, dry rot or other wood damage is found.
- 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.
- Survey Fee: This fee goes to a survey company to verify all property lines and things like shared fences on the property. This is not required in all states.
- Transfer Taxes: This is the tax paid when the title passes from seller to buyer.
How to Reduce Closing Costs
The number one way to reduce closing costs is to negotiate that the seller pays them for you. Depending on the type of loan you are applying for (see loan options here) you can ask the seller to pay up to 6% of the cost of the home in closing costs for you. That would be $12,000 on a $200,000 home. You can do a lot of things with that extra money such as buy down points on your mortgage which in turn gives you a lower interest rate. You could buy out of your existing lease on your apartment so you do not have to wait as long to buy a home.
Unfortunately not all sellers are willing to cover your closing costs for you altogether, but as with most anything in life, there are ways to avoid paying the full price. Did you know that if you schedule your closing at the end of the month, rather than the middle or beginning, especially, you can reduce the closing cost? It is one of the most simple, yet effective ways to avoid paying more than you have to. For instance, if you were to close at the beginning of the month, you will be charged the "per diem interest" for every day between the date you scheduled the closing, until the end of the month. Close near the end of the month and you are guaranteed to pay less. Less time in between; less money.
Another great way to reduce the closing cost is to search for a loyalty program. Some banks, such as Bank of America, offer customers assistance with their closing costs, so long as they are using the bank to finance their purchase. They may offer reduced origination fees, for preferred reward members. As stated in a Realtor.com article, in a sense, it's the bank's way of offering a reward for being a customer.
Depending on how dedicated you are to reducing the closing cost, there are many more options you can go with to do so, such as joining a union, joining the military, or maybe wrapping the closing costs into the loan. Purchasing a home does not have to be expensive. If saving money is possible, why not? Remember, do your research, compare and remember anything is possible through negotiation.
If you have any other questions about closing costs feel free to reach out to us at the number below or email us at your convenience. We specialize in helping people buy homes no matter what their situation is.