Buyers Guide To Closing Costs
Before getting the keys to your dream home, you have to go through the closing process. Not exactly the most exciting part of buying a home, but one that is necessary to transfer the ownership of the house from the seller to you.
That said, it's crucial to have a clear understanding of the process and the costs involved to complete a real estate transaction.
A common mistake many buyers make is trying to cut closing costs by not working with a buyer's agent. Most experts will agree that money spent on a real estate agent is money well spent.
We strongly advise that you don't go through the closing process all by yourself. Just find a real estate agent because having one representing you can make all the difference in your transaction. A buyer's agent understands all the technicalities and complexities of closing and can help you smooth-sail through the process and ensure you don't fall victim to some of the common pitfalls that kill deals such as unexpected title issues and even issues with the lender.
What are closing costs?
A closing cost is any expenses, fees, or charges that must be paid out-of-pocket at the time of closing, in addition to the house price. Closing costs generally range between 2% - 5% of the home's purchase price, and both the buyer and seller may be subject to these costs.
There are two types of fees associated with buying a home: recurring and non-recurring closing fees.
Recurring closing costs include taxes, homeowner's insurance, association dues, maintenance costs, and interest payments on any loans used to purchase the property.
Non-recurring closing costs are one-time charges associated with purchasing a home, such as real estate agent fees, premiums for title insurance, appraisal fees, loan processing fees, reconveyance fees, escrow fees, inspection fees, etc. Note, some non-recurring costs may be due even before you close the home, so it's good to be prepared.
How much are closing costs?
Closing costs vary with location and property type. Typically, buyers can expect to pay between 2% to 5% of the purchase price. Even so, closing costs may be more or less depending on the state, mortgage lender, and type of loan.
The buyer's closing costs are often significantly more than those of the seller, and there are many reasons for this. Buyers usually have to make a down payment and incur costs like loan origination fees, points, and prepaid interest on the mortgage loan, title fees, appraisal fees, inspection fees, attorney fees, and any other fees associated with the real estate transaction. On the other hand, some of the main seller's closing costs are real estate commissions and transfer taxes.
What are the different types of closing costs?
This is a fee lenders charge for processing your loan application. The fee varies with the lender and will be applied toward closing costs if you are approved for a mortgage.
Agent / Attorney fees
These are the fees charged by a real estate attorney or a buyer's agent for representing your interests in the home buying process.
The appraisal fee is paid to a professional appraiser for the valuation of the home you are about to buy. The price varies depending on the market, the complexity of the home being appraised, and the appraiser's experience level.
These are the fees incurred for delivering documents from one party to another throughout the transaction.
Credit report fee
This is the fee charged by the company that provides home lenders with your credit report, usually a credit bureau or a third-party service.
Escrow fees cover the costs of setting up an escrow account, which is used to hold funds for property taxes, homeowners insurance, and other closing costs.
FHA mortgage insurance premium
FHA borrowers pay a mortgage insurance premium (MIP) at closing, regardless of down payment size. It includes a one-time premium fee and an annual payment usually rolled into the loan balance and paid over the lifetime of the loan.
A Homeowners Association (HOA) transfer fees
Some residential properties require the homeowners to be part of an association that charges monthly or annual dues to maintain and upkeep common areas such as swimming pools and tennis courts.
Homeowners insurance covers your personal property and liability claims against you and your home. You will need to provide proof of homeowners insurance at closing, so contact an insurance company before your closing date to get an estimate.
Home inspection fees
The cost of an inspection varies depending on the company, the size of the home, and the property's location.
Lender's title insurance
If you're financing the home using a mortgage, the lender will require you to buy a lender's title insurance. This protects the lender against losses if any problems with the home's title arise (for example, someone else could claim ownership). The lender's title insurance is usually based on the loan amount and can be paid at closing or rolled into your monthly payments.
The origination fee is an administrative fee typically charged by a lender for processing your loan — usually a percentage of the loan amount.
Owner's title insurance
The owner's title insurance costs are based on the home's purchase price and is paid as a one-time premium at closing. An owner's policy insures you against risks such as a forged signature on a deed or mortgage document, new claims to the property, and even lawsuits by contractors who might claim the previous owner did not compensate them.
Private mortgage insurance (PMI)
PMI is paid when a borrower puts less than 20% of the down payment. This insurance protects the lender's investment in case the buyer defaults. PMI rates vary and are charged annually, based on the loan amount, your credit score, and down payment.
Prepaid daily interest charges
This is the charge the purchaser owes the lender for the number of days between closing and the start of the month.
You may be required to pay property taxes upfront. The cost will depend on your location and payment mode. That's whether you'll pay the amount in installments throughout the year or have a lump sum due when you buy the house.
Rate lock fee
A rate lock fee is a charge for locking in your mortgage interest rate. If you're buying a home, you might want to lock in an interest rate because it protects you from rising rates.
This fee, also known as recording tax, is paid to the local government agency responsible for recording transactions. Recording fees ensure that all property transactions are officially recorded.
It's an optional fee, but some buyers prefer to get a property survey. A surveyor takes measurements of the property to confirm whether it complies with local ordinances and also verifies the land's boundaries.
Tax monitoring and tax status research fees
Property taxes aren't included in mortgage payments as they are with rent, so lenders hire third parties to ensure that borrowers pay their taxes in a timely fashion to avoid home foreclosure.
Title search fee
A title search fee is required to verify that the seller is indeed the rightful owner of the property and if there are other claims on the property.
This is the fee that the lender charges to evaluate the loan application. It includes pulling a credit report on the borrower and evaluating the borrower's ability to repay the loan.
Can you negotiate closing costs?
The short answer is yes; you can negotiate closing costs. But it's easier said than done, especially if you don't have a competent real estate agent representation you.
Closing costs are a necessary evil of real estate transactions, and with only a few exceptions, most closing costs are fixed and non-negotiable.
The good news is you can negotiate with the seller to cover some of the closing costs instead of paying out of your pocket.
All in all, there's no denying that closing costs can be a bit of a burden on the homebuyer. The cost of buying a home is already expensive, and these unavoidable expenses don't make it any easier. Nonetheless, you can save some bucks by working with a real estate agent and trying to negotiate where you can.
CENTURY 21 North East is knowledgeable about the buying process in New England and can answer any questions you may have about closing costs. Contact an agent today!