Closing is when the title of the property is transferred from the seller to the buyer, and is the last step in buying a home. Closing costs are the fees associated with your purchase. They are incurred by either the buyer or seller and can vary in each situation, depending on where you live, the property you buy, and the type of loan you choose.
When are closing costs due? You could pay as you go along for each step involved, but typically, closing costs are all due at the close of escrow. In many cases, they’re all rolled into the mortgage, which spreads them out over time but boosts your monthly house payment. Whether you are a first-time buyer looking to enjoy the benefits of owning your own home or looking to refresh your memory, we’re sharing everything you need to know about closing costs.
Homebuyers typically pay about 2 to 5 percent of their residence’s purchase price in closing costs. That can be a significant amount, so again, work with your agent to determine what is negotiable. Your lender will give you a loan estimate within three business days of receiving your completed loan application and it will include the total sale price as well as what the closing costs on your home will be. But these are just an estimate and many of the fees listed can change. If they do change, you should receive a revised loan estimate.
Even before closing costs are due, the lender will require that you have a homeowner’s insurance policy on the property. Unless you’re paying cash for the house, you cannot buy without backing from a mortgage lender, which comes in the form of a commitment letter.
Your lender is required to outline your closing costs in the loan estimate and a closing disclosure you receive before the final day of closing. Take the time to review them closely and ask questions about anything you don’t understand.
With so many types of closing costs possible, we’ve narrowed down a list of the most common examples homebuyers might incur. One of the reasons to use a real estate agent is that they can keep you apprised before closing costs are due, so there shouldn’t be any surprises. Just remember that everything is negotiable, with the seller sometimes agreeing to share closing costs or drop the home’s price to help move the real estate transaction along.
Here’s a look at the total closing costs you might face:
Closing costs are expenses associated with the home buying process that both the buyer and the seller incur. However, it’s important to note that the responsibility for paying these costs can vary depending on various factors, such as local customs, negotiations, and the purchase agreement terms.
Typically, the buyer is responsible for most of the closing costs. This includes expenses such as appraisal fees, the application fee, recording fee, and loan origination fee. Buyers should budget for these costs and be prepared to pay them at the closing of the sale.
While buyers typically bear the brunt of the closing costs, the seller is not entirely off the hook. The seller is usually responsible for costs like real estate agent commissions, the transfer tax, and some portions of the property taxes. However, sometimes these expenses can be negotiated between the parties involved so this is something to keep in mind.
As mentioned, many of the fees that make up closing costs are negotiable and some are completely unnecessary, especially things such as high administrative, mailing or courier costs charged by your lender. Remember that you can shop around and might be able to find other lenders who are willing to offer you a loan with lower closing fees.
Closing costs can add up, but there are ways to reduce them and save some hard-earned cash. Consider the following strategies:
One effective way to reduce your closing costs is by negotiating seller concessions. These are agreements where the seller agrees to contribute a certain amount towards the buyer’s closing costs. Discussing this possibility with your real estate agent and including it as part of your offer is important.
Don’t settle for the first lender that comes your way. Shop around and compare loan offers from multiple lenders. Look for competitive interest rates, reduced origination fees, and discounts on certain closing costs. Doing your due diligence can help you find the best deal and save money.
Explore loan programs that offer assistance with closing costs. For example, if you’re a veteran, consider a VA loan, which often has lower closing costs and may not require a down payment. If you qualify for an FHA loan, you may be eligible for seller concessions and a lower down payment requirement.
Once you’ve chosen a lender, request a loan estimate. This document outlines the estimated closing costs associated with your loan. Carefully review it and compare it with estimates from other lenders. If you notice any discrepancies or have questions, don’t hesitate to seek clarification from your lender.
Another option to explore is a no-closing-cost loan. With this type of loan, the lender covers some or all of the closing costs in exchange for a slightly higher interest rate. While there may be better choices for some, it can be beneficial if you prefer to reduce upfront expenses.
Consider timing your closing strategically. Closing towards the end of the month can reduce prepaid interest costs, as you’ll have fewer days before your first mortgage payment is due. Discuss this option with your lender to see if it aligns with your financial goals.
Closing costs are inevitable in the home buying process, but there are ways to minimize their impact on your finances. By understanding who typically pays for closing costs and implementing strategies to reduce them, you can save money and achieve a more affordable transaction. Remember, working closely with your real estate agent and lender to explore all available options and make informed decisions is important.
Reviewed by Chris Fryson
Chris Fryson currently serves Berkshire Hathaway HomeServices California Properties as its VP of Human Resources. Prior to this role, he was a successful Branch Manager in several offices throughout San Diego and has won several awards in his service to the real estate market and its professionals.
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