What are Closing Costs, and How Much are They?
Buying and selling a home can be an exciting time. However, it can be overwhelming if it’s your first time. Have no fear! Knowing what costs you are facing and how much they will be can put your mind to ease. After all, no one likes surprises when buying or selling a home.
What are closing costs?
Closing costs are fees associated with purchasing a home and are paid at the end (closing) of a real estate transaction. At closing, the property’s title is transferred from seller to buyer. Closing costs are incurred by either the seller or the buyer.
How much are closing costs?
Homebuyers will typically pay between 2 to 5 percent of the purchase price of their home in closing fees. So, if your home costs $300,000, you might pay between $6,000 and $15,000 in closing costs. On average, buyers pay approximately $3,700 in closing fees, according to a recent survey.
Within three days of completing your loan application, your lender will give you a Loan Estimate for your loan, including the closing costs on your home. The Loan Estimate is just an estimate, and many of these fees can change.
Many of the fees that make up closing are negotiable. Make sure you shop around for a lender who is willing to offer you the lowest amount of fees at closing.
Closing Disclosure Statement
You will be given a Closing Disclosure Statement at least three business days before your closing. You should then compare this to your Loan Estimate and ask the lender to explain each line item on your closing costs and why it is needed. This is a crucial step. There are limitations on the amount the number of fees can increase from the Loan Estimate to the Closing Disclosure, so there really shouldn’t be any surprises on closing day. But if there are, you can still walk away at the closing.
What fees can you expect at closing?
The property you buy, the type of loan you choose, and where you live can all affect your closing costs.
Here is a list of fees that MAY be included in closing. It is not likely that your loan will include all of these costs.
- 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 a credit check for your credit score or appraisal. Not all lenders charge an application fee, and it can often be negotiated.
- Appraisal: This is paid to the appraisal company to confirm the home’s fair market value.
- Attorney Fee: An attorney can review the closing documents on behalf of the buyer or the lender for a fee, although it is not required in all states.
- Closing Fee or Escrow Fee: This is paid to the title company, escrow company, or attorney for conducting the closing. The title company or escrow oversees the closing as an independent party in your home purchase. Some states require a real estate attorney to be present at every closing.
- 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 gets your credit history and score. Your credit score plays a significant 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 can also roll this into the loan cost if you prefer.
- Flood Determination or Life of Loan Coverage: This is paid to a third party to determine if the property is in a flood zone. If the property is within a flood zone, you will need to buy flood insurance. The insurance, of course, is paid separately.
- Home Inspection: You will likely get a home inspection to verify the condition of a property and check for home repairs needed before closing.
- Home Owners Association Transfer Fees: The Seller will pay for this transfer which will show that the dues are paid current, what the dues are, a copy of the association financial statements, minutes, and notices. The buyer should review these documents to determine if the Association has enough reserves in place to avert future special assessments check to see if there are special assessments, legal action, or any other items that might be of concern.
- Homeowners’ Insurance: This covers possible damages to your home. You can pay your first year’s insurance at the 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.
- Lead-Based Paint Inspection: Covers the cost of evaluating lead-based paint risk.
- Loan Discount Points: “Points” are prepaid interest. One point is one percent of your loan amount. This is a lump-sum payment that lowers your monthly payment for the life of your loan.
- Owner’s Policy Title Insurance: This is an insurance policy that protects you if someone challenges your ownership of the home. It is usually optional.
- 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 there is evidence of termites, dry rot, or other wood damage.
- Prepaid Interest: Most lenders will ask you to prepay any interest that will accrue between closing and the date of your first mortgage payment.
- Private Mortgage Insurance (PMI): If you’re making a down payment that’s less than 20% of the home’s purchase price, chances are you’ll be required to pay PMI. If so, you may need to pay the first month’s PMI payment at closing.
- Property Tax: Typically, lenders will want any taxes due within 60 days of purchase by the loan servicer paid at closing.
- Recording Fees: This is a fee charged by your local recording office, usually city or county, for recording public land records.
- Survey Fee: This fee goes to a survey company to verify all property lines and things like shared fences on the property. Not all states require a survey fee.
- Title Company Title Search or Exam Fee: This fee is paid to the title company to search the property’s records thoroughly. The title company researches the deed to your new home, ensuring that no one else has a claim to the property.
- Transfer Taxes: This is the tax paid when the title passes from seller to buyer.
- Underwriting Fee: This also goes to your lender, covering the cost of researching whether or not to approve you for the loan.
- VA Funding Fee: If you have a VA loan, you may be required to pay a VA funding fee at closing (or you can roll this fee into the loan cost if you prefer). This is a percentage of the loan amount that the VA assesses to fund the VA home loan program. However, some borrowers are exempt from this fee. The percentage depends on your type of service and the amount of your down payment. Here is a breakdown of the cost of the VA funding fee and a complete list of allowed fees for VA loans.
Can homeowners avoid closing costs?
There is such thing as a no closing cost mortgage. However, this could end up costing you more in the long run. The lender may charge a higher interest rate on the loan or add the closing costs to the total mortgage causing you to pay interest on the closing costs. You can negotiate the closing costs with the seller over who will pay the fees. The seller might even agree to pay the buyer’s closing fees.
Erica Diaz Team – What are Closing Costs, and How Much are They?
Buying a home is one of the most important transactions you will make in your lifetime. It is a lot of information to take in, but being informed beforehand can make the process go a lot more smoothly, and before you know it, you will be in the house of your dreams!
If you are looking to buy a home in Central Florida, contact our team today! We can help you find your perfect home and walk you through the entire process from start to finish!