When you’ve finally come across your dream home, the entire process of buying may seem exciting and fun, mainly when you’ve already applied for a mortgage and saved for the down payment.
But you’ll also need to pay closing costs, which can leave you with a hole in your pocket after you’ve made the down payments.
Understanding closing costs and knowing how to stretch your budget will help you complete the final transaction to gain the keys to your new home.
What are Closing Costs?
Once your home is finalized, there are closing costs that go towards the process that occurs during the transaction. Throughout this process, there are professionals, such as your real estate agent and mortgage lender, that have served you, and these costs will include their fees and others.
Since real estate transactions can be somewhat complicated, there is a lot involved, and some states require mandatory inspections where you can or cannot pay an inspector directly.
Other costs will include appraisal fees, taxes, surveys, discount points, deed recording fees, along with homeowner’s insurance and mortgage insurance.
Who Pays Closing costs?
Buyers tend to pay most of the closing costs, while the seller pays their real estate agent’s commission. If there is a buyer’s market (one where the supply is greater than the demand), sellers may be willing to pay a part of the closing costs, while they may be less willing to negotiate in a seller’s market.
While there are specific costs associated with both the buyer and the seller, it wouldn’t hurt to negotiate and ask your seller to share the closing costs. Here are some of the prices for the two:
Closing Costs for Buyers
The buyer has to pay for the application for their mortgage, mortgage fees, discount, and origination points. You will also have to pay the broker’s fees, mortgage insurance, and to pull a credit report from the mortgage lender. If you buy or have discount points, that can lower your interest rate by one percent, while an origination point compensates the broker or lender for their services.
Closing Costs for Sellers
There are specific costs for the seller to cover, such as their real estate agent’s commission deducted from the total sale proceeds. They will also pay for their lawyer’s fees if they hire one.
If the seller hasn’t paid the annual property taxes, the price for the number of days that they didn’t pay can be deducted from the total amount that the buyer has to pay at the closing table.
These costs are allocated to those professionals that provided service during the entire process.
The charges can include home inspectors, lawyers, and other service providers, including appraisal fees, tax service fees, and credit report fees.
How Much are Closing Costs?
Closing costs tend to range anywhere between about three to five percent of the home’s value. It can vary according to the state you’re in and depends on the home’s value and the locality in which it is being sold. However, transactions that require cash may have few costs as compared to those that are financed.
If your home value is around $400,000, you can expect to pay about $8,000- $20,000 for closing costs.
Reducing Closing Costs
While you may be worried about being stumped with closing costs, there are ways that you can reduce them:
Compare Different Lenders
The closing costs for a home don’t fall into the category of ‘small change,’ which is why you need to look around and compare lenders providing the lowest closing costs. Apart from getting quotes from mortgage lenders, you can also try approaching companies for low-priced services since there are certain services, such as the pest inspection fee and title search, that you can look around for on your own.
You don’t always have to choose these suggestions from your lender, and you can find the services and compare them yourself. You can see what you will require on your loan estimate.
Thoroughly Examine the Loan Estimate
Once you receive your loan estimate from your mortgage lender, ensure that you thoroughly evaluate each item and go over with your lender, asking them what the fees are for and why it costs that much to avoid unnecessary expenses.
Sometimes you may find fees with similar names, such as the underwriting and processing fees, which are the same. Ask your real estate agent to help you out with identifying any mistakes.
Get Ready to Negotiate
Once you’ve received your loan estimate and have understood what fees your mortgage lender wants you to pay, ask them to remove unclear fees from the list once you run it by your real estate agent.
You should also ask them to provide you with a closing disclosure form, which will include your final costs. Compare and question any discrepancies between it and the loan estimate you received.
When it comes to your seller, they may be willing to decrease the home’s total price to avoid the costly closing costs, while some may consider helping you out with a few expenses. Ask your real estate agent to start discussing and negotiating the deal to cut costs.
Postpone Your Closing Date
One of the many closing costs includes prepaid interest charges charged daily starting from the date you cover your mortgage loan until you can complete your first monthly payment.
Think about this beforehand and schedule the closing date closer to the end of the month. It will help to minimize the charges.
Add the Costs to Your Mortgage
If you’re tight on cash, you should ask your lender about possible options because they may be able to add the closing costs into your entire mortgage loan. However, this may not be a good idea because while you might save money temporarily, it will be added to your loan and interest amount, which will cost you heavily for monthly payments.
Preparation is Key
Instead of hurting your finances at the end of the process, you should do your research, take your real estate agent’s help, and work out your budget. This way, you will have enough resources to pull you through the months after moving into your dream house.