The closing is the point in a real estate deal when the title is actually conveyed from the seller to the buyer. There are a number of miscellaneous fees called closing costs that must be paid to the lender at this time. There’s no way to get rid of closing costs altogether, but there may be ways to manage the overall cost if you know what to do.
What Fees are Included in Closing Costs?
Basically, any company that had anything to do with the real estate transaction at any point expects to be paid out of the closing costs when the closing takes place. Though the items you are required to pay for vary depending on where the home is located, you’ll normally have to pay:
- Attorney’s fees
- Home inspection, property survey and appraisal costs
- Title search fee and title insurance premium
- Credit report costs
- Loan origination and underwriting fees
- Recording fees
- Discount points
- Escrow deposit
Some of these costs are fairly straightforward, but others might be new terms to you. Recording fees are assessed by the city or county the home is located to cover their costs of the associated land record paperwork. Lenders assess loan origination fees to cover the time and cost associated with them processing the mortgage’s paperwork and underwriting fees to cover their cost to evaluate your mortgage application. Discount points are usually paid for a buyer in exchange for the lender offering a lower interest rate. Your escrow deposit is a lump sum that will cover the cost of property taxes, private mortgage insurance (PMI) and interest from the date of the closing until the end of the month.
FHA loans usually have similar types of closing costs, but every local Federal Housing Administration (FHA) office will determine what fees are allowed and what aren’t. Any fees that the FHA deems unallowable are usually paid by the seller.
How Much Will My Closing Costs Be?
Every situation is different, so there’s no way to tell exactly what your closing costs will be. They will be determined in large part by the state, city or county the home is located in, the loan amount you are borrowing and any other deals you have made with the lender to keep your monthly payments low. However, closing costs generally average anywhere from two to five percent of the home’s purchase price, but they can be as low as one percent or as high as eight percent. That means that on a home that costs $200,000, you most likely will spend between $4,000 and $10,000 on closing costs.
You won’t have to figure the closing costs out for yourself. Your lender is required to provide you with a good faith estimate (GFE) of these costs and fees within three days of receiving your loan application. Remember that this is just an estimate and it will most likely change by the time the closing takes place, but it’s a good starting point. As you get closer to the date of your closing, you should receive a HUD-1 settlement statement from your lender. This is similar to the GFE, but it lists the finalized costs so you can prepare the check you’ll be required to bring to the closing.
Do I Have to Pay for Closing Costs?
Closing costs are a necessary evil for every real estate transaction. The lender is responsible for paying a number of different companies and organizations that helped to bring the closing to fruition, and they always pass that cost along to the buyer. Just because you have to pay closing costs when buying a new home doesn’t mean you have to pay them all in one lump sum.
Some lenders will let you roll the closing costs into the overall mortgage, but that can cost you big bucks in interest over the long-term. If you are taking out a $200,000 mortgage over 30 years at a fixed rate of 4.5 percent and you roll closing costs of $4,000 into the loan, you’ll wind up paying an additional $3,300 in interest due to the addition of the closing costs. You might also find lenders that will waive the fees but charge you a higher interest rate. If the lender charges you 4.75 percent instead of 4.5 percent on that $200,000 loan, you’ll end up paying more than $10,000 in additional interest.
If you find that your lender won’t budge on the closing costs, you may still have another avenue if you just can’t come up with the money for the closing. Talk to the seller of the home. It’s possible that he might pay the closing costs for you in exchange for you paying a higher price for the home. If the seller is eager to close the deal, this may be a real possibility.
Can I Save Money on Closing Costs?
Closing costs usually are what they are, but there are sometimes ways to manage them by shopping around. The lender might let you choose the companies that will perform the survey, appraisal, home inspection and title searches. If that’s the case, you can shop around to find the best prices. You might also b able to negotiate some of the costs, including commission rates, recording costs and attorney’s fees.
When you receive your HUD-1 statement right before the closing, check it against the GFE you received when you filled out the application for the loan. These two statements are usually fairly close, so if you see any large variances in costs, question your lender about them as they might be errors.
A simple way to keep your closing costs down is to close as close to the end of the month as possible. Let’s say you close on your home on June 2nd. That means that you’ll have to pay per diem interest for 28 days. If you close on June 27th, you’ll only be charged for three days of interest for the month. Also, keep in mind that if you are a member of the military, you may be able to take advantage of government closing-costs benefits, even if you’re taking out a conventional mortgage rather than a VA loan.
2 Point Highlight
There’s no way to get rid of closing costs altogether, but there may be ways to manage the overall cost if you know what to do.
Just because you have to pay closing costs when buying a new home doesn’t mean you have to pay them all in one lump sum.
