The Ultimate Guide to Closing Costs
In Escrow Services, by Anthony Bayardelle
The main things everyone considers when buying a house are the price of the house itself and how much of a down payment you have to pay. For this reason, many people are blind sighted by just how many closing costs come with the act of buying (or selling) a house.
Here's a guide to closing costs so you don't get surprised by anything that's coming your way during the escrow period.
How much are closing costs?
Closing costs usually amount to 3% to 6% of the total purchase price, all things considered. This might not sound like much, but if you are buying a $600,000 house, this means your closing costs could be between $18,000 and $36,000.
There are some closing costs calculators that can give you a ballpark of what you’re looking to pay on your specific detail, but there’s no way to know for sure without talking to your mortgage lender and/or your realtor.
These closing costs are due at the end of escrow when your loan closes, so you need to plan for them to make sure they don't take you by surprise.
What is included in closing costs?
The things covered in your various closing costs vary from house to house, as well as state-to-state. Fortunately, a complete list of the closing costs you will be expected to pay will be included in the loan estimate provided by your lenders. By law, they have to give you this estimate within three days from the time they received your loan application.
Here are some of the things that might be included:
Part of the closing costs are the commissions paid to both the buyers’ and the sellers’ real estate agents. The typical amount of commission is 5% to 6% of the total deal, split between the buyer’s agent and the seller’s agent. However, this number is not set in stone and is completely negotiable between you and your realtor. Make sure this is one of the things you discuss ahead of time, preferably before you even decide which realtor you want to work with.
The home inspection, separate from the appraisal, is usually between $300 and $500. This is not technically included in your closing costs, because it is paid in person to the inspector, but it is still an added fee you should be aware of.
An appraisal, usually between $300 to $500, is a mandatory part of the escrow process. It is required by your lender to make sure your home is actually worth the sales price that you are paying.
Earnest money is a small amount, usually between 1% and 3% of your total home price, that they buy her panties ensure your escrow account as soon as a deal is accepted. Eventually, this amount is subtracted from your closing costs, reducing the amount you owe at the very end of escrow.
Sometimes escrow fees include paying your insurance up front or contributing portions of your yearly property taxes ahead of time. These things will go into your escrow account, but count is closing costs.
Title fees are the costs accrued in transferring the house is title from the seller's name to your name. They should be pretty minimal, but do exist.
Private Mortgage Insurance (PMI)
As we discussed in our guide to down payments, some mortgages and down payments mouths require that you pay private mortgage insurance, as well as your loan payment. You can often Ops to pay this as a one-time fee at closing, rather than every month along with your loan payment.
Double check with your lender or your realtor to learn about your options if you are required to pay PMI.
Attorneys fees include things like pay notaries, government filing fees, escrow fees, and other legal expenses accrued throughout the escrow process. If you want to know more specifically what these these fees entaill, this is a good question to ask your realtor.
These fees will vary depending on who is processing your loan. It's wise to ask about lender fees up front, because many unscrupulous lenders will advertise low loan rates, but then make money on the back end via higher lender fees.
If you “assume” or take over the balance that is left on the seller's mortgage, there might be a variable fee (based on the balance) that you need to pay at closing.
There will be a small gap of time between the closing date and the first day of the following months. You will often need to make a small payment of pro rated loan interest to cover for this period of time.
Loan Discount Points
Buying a loan discount point is one of the best ways to decrease your overall interest amount for your loan. Basically, by paying this one time fee at the time of closing, your lender will agree to give you a lower interest rate throughout the course of your loan.
This can be incredibly beneficial and save you a great deal of money in the long term in some situations, so talk to a lender or to your realtor if you think this could be of interest to you.
It is standard for buyers to pay two months worth of county and city property taxes at the time escrow closes.
Is there is a chance your new home could be on or near a floodplain, it might be necessary to get a certification from the Federal Emergency Management Agency (FEMA) to confirm its status. This should only cost $15 or $20, but it is still an important step if this applies to you. Check with your realtor if you think this might be the case.
What are closing costs for the buyer?
Usually the buyer is responsible of a majority of the closing costs, typically between 3% to 4% of the homes total price.
Which closing costs are paid by each party is definitely negotiable and varies between situations, so this is one of the things you can talk about with your realtor when your making an offer on a house. In a buyer's market, it is often possible to get a seller to help with more than their usual share of the closing costs as part of the deal.
Things the buyer usually takes care of include all of the fees related to getting your home loan, the fees for appraising and inspecting house, any title, underwriter, or survey fees, and the commission for the buyer's agent.
What are closing costs for the seller?
The seller of a house usually has to pay a much more minimal set of closing costs, Typically between 1% and 3% of the homes total value.
The seller's fees typically include any payments or commissions for an attorney, if the seller used one, taxes on the sale of the home, title transfer fees, and the commission for the sellers’ own real estate agent.
In a buyer's market, it is possible that the seller might be asked to take on a greater portion of the closing costs, whereas in a seller's market a seller could possibly even ask the buyer to cover all the closing costs. Again, these details can be negotiated with the offer for the house.
Do closing costs include my down payment?
No, unfortunately, closing costs are a separate set of fees, on top of the down payment.
When do you pay closing costs?
While the down payment is always paid at the end of the escrow period, closing cost can be accrued at any time during the escrow process, though most are due at the end of escrow.
Some things, like appraisal fees or inspection fees, need to be taken care of in the middle of the escrow period (in these cases when the appraisal or inspection happens). Other fees, like PMI, can be rolled up into your mortgage and paid overtime with the rest of your loan.
Can you finance closing costs or roll them into your mortgage?
As a buyer, it is possible to reduce your closing costs by Rolling some of them into your mortgage payment. This doesn't mean you don't have to pay them, but they are lumped in with the rest of your loan, meaning you have to pay a larger amount back, but less of it is due upfront.
Considering interest as a factor, this isn't usually a good long-term move unless you are incredibly short on cash at the time of closing, but it is a good option to be aware of.
How do you reduce closing costs?
Utilize Your Discounts
If you happen to be in a union, a member of the military, or other specialty groups, you might have special benefits, discounts, or rebates when it comes to closing costs specifically or buying a house in general. Make sure you don’t leave any extra money on the table here.
Negotiate them as Part of Your Deal
When you are putting in an offer for a house and negotiating your final deal, it is allowed for sellers to contribute up to 6% of your final sale price as a “closing cost credit”. This is a tax deductible expense for the seller, and is a great way to reduce closing costs for the buyer.
However, in a seller's market, this is usually pretty uncommon, so you can't count on closing cost credits in today's low inventory market.
Close Escrow at the End of the Month
As mentioned above, if you close escrow at the beginning or middle of the month, you have to pay interest on your loan prorated for the period between closing and the first of the month. Selecting an escrow closing date that also happens to be the end of the month is a great way to cut back on this extra expense.
Ask Your Lender about a No Closing Costs Mortgage
Usually mortgages come with a certain amount of lender fees that have to be paid. These are even higher if you're choosing to buy points on your mortgage, or if there are other factors at play. If you're low on cash at the time of sale, or you want to save your money for your down payment, you can try talking to your lender about a mortgage with lower or no closing costs. This isn't an option all the time, but sometimes it can be a useful strategy.
One word of warning, usually when there are lower closing costs it does slightly increase your interest rate overall, so we're your options carefully if you're considering this course.
The Big Picture
Overall, closing costs don't really account for a huge amount of your sale, over the course of your mortgage.
However, if you don't see them coming and don't plan for them financially, they can come as quite a surprise at a very bad time to be getting Financial surprises. For this reason, it's important to do your research ahead of time and find out exactly what closing costs are waiting for you at the end of escrow. Talk to your loan broker, your realtor, or schedule a free consultation call with me to go over your specific situation and figure out exactly what cost you are expected to pay when escrow closes.
By doing your due diligence ahead of time, you'll be financially prepared and your escrow period will be able to close without a hitch.