Are You Factoring in Closing Costs when Buying a House?
Buying a home is not as simple as getting a mortgage and finding the perfect house. There are many fees, deposits, and down payments to make before getting to the finish line.
One cost that comes as a surprise to first-time homeowners are the closing costs. These are the fees associated with “closing” on the loan. Closing costs can be up to seven percent of the purchase price of the home. This is why homeowners need to save for these costs and should learn how to keep them as low as possible.
Paying Closing Costs
Do not worry about that whopping seven percent estimate. The great thing about closing costs is that the home seller will pay a portion unless the home buyer has offered to take on the full costs in their offer. Most home buyers will pay up to four percent and the home seller will pay that remaining three percent. These costs will be paid at closing to finalize all the last details of the sale.
The Portion For Buyers
Yes, buyers are paying most of the closing costs. But one way to save on closing costs is to pay for the home in cash instead of using a mortgage. Mortgages add extra fees that need to be taken care of by the home buyer.
The first fee that will need to be paid will be the origination fee. This is a charge to process the loan. Home buyers will also need to pay for their credit report to be pulled. At the same time, there is also a fee that allows lenders to assess credit during the underwriting process.
A buyer should get an appraisal and a home inspection which will be paid out of their pocket. To avoid any unpleasant surprises they should search the title for any liens. Some may even pay a survey fee.
If the buyer needs to pay private mortgage insurance (PMI) this will be expected at close. There are many one time fees that can vary along with attorneys to pay. With all of these costs, a buyer should be saving a significant amount alongside their down payment.
The Portion for Sellers
Sellers have a much smaller list of items to pay for. While buyers often sweeten the deal by offering to pay the seller’s portion, sellers can expect to pay the closing fee on the loan.
Sellers will also cover the taxes that are incurred from the home sale. Their attorney must be paid if there is one present. Finally, there is a charge to transfer the title to the home buyer.
Although this list is relatively short compared to the buyers’, the final item takes the biggest chunk: the real estate agents’ commission.
Average Closing Costs
Averaging closing costs is hard. Different areas and real estate markets will have different closing fees that must be paid. Even the fees within these areas will vary from sale to sale.
On top of this, averaging out the cost of closing is not cut and dry. Learning more about what fees are charged in the area can help a homeowner to estimate these costs themselves.
Fortunately, the lender has to disclose the closing costs to the home buyers three days before closing day. A closing disclosure will be provided that outlines the costs that will be incurred. Always look through the closing disclosure and look for any discrepancies.
How to Lower Costs
The first way to reduce costs is to look at the lender. Many lenders have reduced closing fees for their members. These loyalty programs encourage members to use their bank and help buyers save a little money.
Timing is important, too. The end of the month is the best time to close to avoid paying per diem interest for the entire month.
If the buyer is in a market that favors buyers they may be able to strike a deal with the seller. Sellers may foot the entire cost of the closing costs if it means closing on the loan sooner. Some lenders even let borrowers pay closing costs with their mortgage. This avoids the need to pay this cost upfront.
Closing costs are something home buyers often fail to plan for. Having this cost come up suddenly can be a problem for those that have thrown all their money into their down payment or their escrow account. To avoid this, learn more about the closing fees in the area and always pay attention to disclosures to know an estimate of what will need to be paid on closing day.