Closing costs accompany mortgage loans and cover the last-minute expenses and fees to close a loan. These costs can be significant – totaling as much as 2% to 5% of the loan amount. Here’s a break down of how these costs work and what you may pay.
If you’re interested in buying a home, a financial advisor can help you create a financial plan for your goals.
What Are Closing Costs?
When you buy a home, there are many fees involved. Everything from assessing the property’s value to the mortgage that pays for the home comes with a cost. There can be a lot of variation in how much you will spend on closing costs depending on factors like the size of the home.
Where you live also has a significant impact on closing costs. For example, closing costs tend to be much higher in states like New York and Delaware than they are in states like Missouri and Indiana. Higher loan amounts tend to coincide with higher closing costs. However, closing costs can also make up a higher percentage of the loan amount in some states than in others.
Buyers usually pay most of the closing costs, but sellers might also have to cover some costs, such as real estate agent commissions. That is good news for buyers as these commissions can run as high as 6% of the loan value. In some cases, that might be more than the total amount of the closing costs for the buyer.
If you feel your closing costs are too high, there are some ways to reduce them. For example, you can check rates with other lenders. Another strategy is to ask the seller to help cover some of the costs. This works well during a buyer’s market; if sellers have the leverage, they may not be willing to contribute.
Types of Closing Costs
There are many distinct types of closing costs. Here are the important ones to keep in mind:
4 Loan Fees
- Application processing fees: There is extensive paperwork involved when you apply for a mortgage loan, so expect to pay fees to process your application.
- Attorney fees: You might have to hire a real estate attorney, depending on where you live. Hourly rates for real estate attorneys vary.
- Loan origination fees: Loan origination fees often make up a significant percentage of closing costs – as much as 1% of the loan amount. This involves things like underwriting and funding the loan, administrative services, and evaluating and preparing the mortgage.
- Mortgage points: Also known as discount points or simply points, you can pay an added fee to reduce your interest rate. When interest rates are high, this cost can be worthwhile. The cost of one point is equal to 1% of the loan amount.
4 Property Fees
- Property taxes: This cost helps your municipality fund things like public schools and roads. While you pay property taxes every year, buyers often must pay some amount of property taxes upfront when moving into a new home. How much you will pay in property taxes depends on where you live.
- Appraisal fee: An appraisal is an important part of the home buying process; lenders must know the home’s value, so they know how much to lend. This fee is typically in the range of $300 to $500.
- Inspection fee: Inspections are separate from appraisals and are more for the buyer’s benefit. Inspections can reveal major problems like water damage and structural issues. This fee is also in the range of $300 to $500.
- Homeowners insurance premium: Homeowners insurance is important for all homeowners to have, and your lender might even require you to purchase it before finalizing the closing. As with most costs, the price of the policy will vary depending on where you live and the home’s value.
3 Title Fees
- Title search fee: Title searches help verify the property’s legal ownership as well as uncover any claims or liens against it. The latter two can be unwelcome surprises, so you will want to know about them in advance. Expect to pay around $200 for this service.
- Owner’s title insurance: You may want to purchase title insurance as the new owner. This policy will protect you if there are any title problems with the home or claims made against it. This will cost about 0.5% to 1% of the purchase price.
- Lender’s title insurance: Your lender might require you to carry a policy that will protect them if there are any issues with the title. This coverage will remain in effect until the mortgage is fully paid.
Mortgage Insurance Fees
Private mortgage insurance (PMI) is typically only necessary in certain circumstances, such as when you put less than 20% down on a conventional loan. If you must obtain PMI, an application fee may come with it, and you might have to pay premiums upfront.
Some programs that help people obtain housing, such as FHA and VA, may also have added fees. For example, you might have to pay premiums upfront or pay guarantee fees.
Buying a home is a lengthy process and is the largest purchase most people make. While the cost is already high, your down payment is not the only cost you will have to cover upfront. There are also numerous closing costs, which tend to be 2% to 5% of the loan amount.
However, the amount you will pay in closing costs varies. For instance, where you live and the loan amount are factors. There are also costs that may be optional, such as mortgage points. Nevertheless, all home sales have added costs, and buyers will need to be prepared.
Tips for Buying a Home
- Estimating your closing costs can be tricky. There’s a lot to think about, from appraisal fees to homeowners’ insurance. SmartAsset’s closing costs calculator makes it easy to estimate how much you will pay.
- A financial advisor can help you make the right choice. They will help you walk through your finances and put together a financial plan. And finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area. Plus, you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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