What Closing Costs to Expect
Don’t forget about closing costs when budgeting for your new home.
You’re ready to buy a new home. You’ve agreed on a price, have a mortgage ready, and booked the movers. However, there is one final expense you’ll need to deal with before you can sign your paperwork, collect your keys, and move in. It’s called closing costs. Understanding what closing costs are and how much you’ll need to pay for them will help you budget for your new home.
What Are Closing Costs?
Closing costs are the fees you’ll need to pay for the services and expenses required to purchase or refinance a home. Most of the closing costs fall on the buyer/borrower, but don’t feel too bad: the seller will be busy paying a percentage of the home’s purchase price for the real estate agents’ commissions.
How Much Are Closing Costs?
On average, the buyer’s closing costs are usually 2% to 5% of the loan amount or $2,000 to $5,000 for every $100,000 worth of home that you are buying.
How Do I Pay Them?
You usually have two options. If you don’t have cash, you may be able to finance your closing costs by folding them into the loan. You can also pay your closing costs upfront as a one-time expense. If you have the cash available, it’s worth it because you’ll save on interest.
What Are the Most Common Closing Costs?
Closing costs differ depending on your lender’s requirements, where you live, and the type of mortgage you have. Even if you have enough money to pay cash for your home, there are still closing costs associated with the actual purchase of real estate, regardless of financing. Some of the most common closing costs include:
- Home Appraisal- The appraisal determines what amount your lender will allow you to borrow. The average cost of a home appraisal by a licensed or certified appraiser ranges between $300 and $600.
- Application Fee- The cost of processing the loan request, including credit checks and administrative expenses. The application fee varies depending on the lender and the amount of work it takes to process your loan application.
- Attorney’s Fees- Some states require an attorney to be present at the closing of a real estate purchase. The fee will vary depending on the number of hours the attorney works for you.
- Loan Origination Fee- Charged by the lender for their work evaluating and preparing your mortgage loan. This can include document preparation, notary fees, and attorney fees.
- Private Mortgage Insurance- If you make a down payment of less than 20%, you may be required to get private mortgage insurance (PMI), which protects the lender if you default.
- Homeowners Insurance- You will likely be required to pay your first year’s homeowners insurance premiums at closing.
- Property Taxes- You may be required to pay up to a year’s worth of property taxes at closing.
- Title and Transfer Taxes- Costs for a title search and transferring the title to you once the home is purchased are included in the closing costs.
- Mortgage Discount Points- Not a requirement, but if you can pay 20% down and have money left over, you may want to buy points, which can lower your interest rate and save you money over the life of the loan.
How Will I Know What I’m Responsible For?
All of these costs will be reflected in the loan estimate and closing disclosure. The lender provides the loan estimate within three days of applying. It lays out the estimated terms for your loan and will list your estimated interest rate and; monthly payment, and detail all fees and other costs for your loan. Take the time to review the document in full and ask questions about anything you don’t understand. While some fees are fixed, there may be some room to negotiate with your lender to reduce or eliminate some of the fees.
Then, three days before you close on your new home, you’ll receive your closing disclosure. This should be similar to the loan estimate, reflecting any final changes to your agreement. Take the time to review and ask questions before closing.
Are My Closing Costs Tax-Deductible?
The IRS allows you to deduct a limited number of closing costs, including mortgage origination fees, prepaid interest and real estate taxes, points, and insurance premiums. However, most fees including title fees, home appraisal, and attorney’s fees are not. Talk to your lender and tax professional about writing these off, especially when filing taxes in the same year you buy your home.
If you’re looking for a home mortgage and have questions about closing costs, talk to one of our Mortgage Experts. They can guide you through the mortgage process, help you understand what closing costs you may be responsible for, and help you find an affordable mortgage.