Deciding to buy a home is a monumental task. Between the paperwork, phone calls, and constant stress, it can be easy to forget about the cost of closing on a home. And more often than not, buyers are surprised by how expensive closing costs can be.
But before you can prepare for closing costs, you must first understand what they are.
Closing Costs – What are They?
There are many components to buying a home; appraisals, inspections, credit reports, etc. These tasks aren’t free, and are typically grouped together as “closing costs,” to be paid when the home loan closes.
The Consumer Financial Protection Bureau states that the law requires closing disclosures to be presented to the borrower at least 3 days before the loan closes. Closing costs typically include:
- Application fee – The cost of processing your mortgage application.
- Origination fee – The cost of the lender creating your specific loan.
- Appraisal fee – Having somebody determine the market value of your home.
- Credit report fee – The cost of having your credit report pulled.
- Underwriting fee – Evaluation and verification of your mortgage.
- Title and research fee – The cost of creating your home’s deed
- Home inspection fee – Having somebody investigate the current state of the house.
You might see other charges depending on your city and state, but closing costs tend to be 2%-5% of the total loan cost. If your mortgage is $100,000, you’ll most likely be paying $2,000 – $5,000 for closing costs.
Bypassing Closing Costs
It is possible to get around paying certain closing costs, but you won’t be able to avoid them all. Although closing costs come from both sellers and buyers, they each generate different closing costs.
For instance, the home buyer will typically pay for the lender, homeowner, and third party fees. But the seller will usually pay title transfer fees as well as commission fees.
Even if you have your closing costs removed when you close on your loan, they’ll most likely be bundled into your mortgage total. This can be a smart maneuver if you don’t have the money to pay for closing costs up front. Instead you will pay them off over a longer period of time. However, it’s almost always more cost efficient to pay the closing costs upfront rather than roll them into monthly payments.
Most closing costs can’t really be negotiated, but typically you have the choice of who you want to perform each service. Services such as credit checks, appraisals, and tax services vary by lender, so you can shop around and see which lender works best for you. You can also look into different vendors for title insurance, home inspection, and homeowners insurance.
Remember; you don’t need to use the vendors your lender suggests. Although they may very well be offering you a terrific list of vendors, you should always shop around and see what your other options are.
Planning Ahead for Closing Costs
In all honesty, closing costs can be quite expensive. Diminishing your closing costs can help put more money in your pocket. The best way to prepare for closing costs is to shop around for different vendors and lenders to see who can offer you the best deal. But there are other steps you can take to help.
Putting funds away specifically for closing costs can be helpful. If your down payment is squared away, and you know you can afford your monthly payments, any other extra money should go toward closing costs. Putting money you received from a tax refund is a great way to help cover closing costs as well. You could also try living below your means and cutting spending on extravagant items.
If you’re concerned about the cost of closing, you should talk to your realtor or your mortgage lender to see what other options you have. You could always try to roll you closing costs into your monthly payments. Although this might lead to you paying more money, at least you’ll be able to move into your new home.