Well-prepared buyers know that the amount of money they need to pay upfront to buy a home is more than just the down payment. Some new homebuyers are also aware of, and budget some money for repairs and upgrades to make their new home livable.
If you’ve considered all the above costs, you’re ahead of the average person. But you might still forget a very important expense: your closing costs.
Remember Closing Costs When Buying a Home
Closing costs are a collection of fees associated with the purchase of your home. Instead of paying each of these fees individually, the expenses are rolled into a single amount that is due at closing.
The fees you might pay as part of your closing costs include:
- Origination fees (for processing and underwriting your mortgage)
- Points (money you pay upfront to obtain a lower interest rate)
- Appraisal fees (for appraising the home’s value)
- Inspection fees (for inspecting the home and identifying problems)
- Title fees (title insurance, recording fees, notary fees, etc.)
- Escrow or attorney fees (for closing the home purchase)
- Property taxes (depending on your state)
- Homeowner’s insurance (to insure the home against damage)
- Mortgage and/or recording taxes (required only in some locations)
Whew! That’s quite a list. Unfortunately, every home buyer has to pay most of these fees. It’s not an easy process to buy a home, which is why it is not cheap.
It’s worth noting that some of the items listed above, such as homeowner’s insurance and property taxes become monthly payments moving forward, but you’re often required to make an initial annual payment at closing when you buy a home.
Estimate the Amount of Your Closing Costs
The number of fees — and the variability of many of them — affect the total amount of expenses included in closing costs. Trying to determine how much you’ll pay in closing costs can be challenging.
The best way to estimate what you need to pay in closing costs is to look at percentages. In most cases, you’ll need to pay 3% to 6% of your home’s purchase price. You should prepare to have this amount in cash at closing, so keep this in mind while conducting your home search.
FICO has a helpful calculator you can use to create your own estimate of closing costs. Remember, tools like this are only as good as the information you plug into them. Use this to get an idea of how much you could pay.
Once you have applied for a mortgage and get into the official loan underwriting process, your lender should provide a more specific estimate for you. Your L.E., or loan estimate, includes what amount the lender predicts you’ll pay in closing costs. These are itemized so you can see each separate fee.
Review this estimate and don’t be afraid to ask your lender about any costs you’re not sure about or don’t understand. You can also ask lenders for quotes on closing costs while you’re still deciding on which one you’ll work with to originate your mortgage loan. Compare these quotes — you may find one lender can close on a home at a lower cost to you than others.
Your lender will give you a finalized summary of your closing costs a few days before your closing date as part of the “Closing Disclosure.” Always compare this document to your initial estimate, and ask your lender to explain any changes.
Negotiate to Pay Less in Closing Costs
In addition to comparing quotes from different lenders before you choose one to work with, know that you can negotiate your closing costs with the seller and/or the lender up front. Make sure you discuss these fees in detail with your loan officer or real estate agent.
No matter what, be prepared to pay the closing costs and don’t get surprised when you’re asked for this substantial amount of money at the very end of your home-buying process.
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