What are closing costs and who pays them? – Insurance NewsNet
While financing advice for prospective homeowners is often dominated by the issue of down payment, closing costs don’t always get as much attention — but they’re a key factor to consider even in the early stages of home buying research.
They only need a spot in your budget for one thing: Closing costs range from 2% to 6% of the purchase price of your home (we’ll get into that in more detail below), so if you’re planning on doing that b. a 3% down payment , closing costs could potentially double your debt at closing — making it much more than an afterthought.
But if you’re a little confused about closing costs — what they are, what purpose they serve, how much they cost you, and how to pay for them — you’re not alone. Check out our guide below and you’ll be an expert in no time.
What is included in the closing cost?
So what exactly are closing costs? At its most basic level, it is a bundle of fees that are due on the closing date of a property sale – basically all expenses except for the down payment. Closing costs can be paid by the buyer, seller, or both, and must be legally disclosed and agreed in advance before the sale can be completed.
While closing costs appear to the buyer as an amount payable to the lender, they actually represent a variety of expenses associated with a home sale — from appraisal to credit check fees — due to a number of different parties. For convenience, they are combined into one amount and paid for in trust (or in other words, held temporarily by an independent third party) until the sale is completed and the funds are distributed to the appropriate entities.
Who Pays Closing Fees?
While the question of who bears which closing costs is generally a matter of negotiation, there are certain closing costs that are traditionally borne by the buyer and others that are typically borne by the seller.
The list of closing costs typically paid by the buyer is generally longer, but they are not necessarily more expensive; In fact, the buyer can expect to pay 2% to 6% of the purchase price in closing costs, while the seller can expect to pay 8% to 10% of the purchase price (although in reality, as we shall see, the question of who really pays what , is more complicated).
Costs to buyers generally fall into one of two buckets: property-related fees and mortgage-related fees.
Property-related fees often include:
- house inspections
- flood certification
Homeowners Insurance title insurance
Mortgage-related fees may include:
Private Mortgage Insurance(PMI)
- Mortgage Application Fee
- Underwriting Fee
- Credit Reference Fee
- credit brokerage fee
The most notable closing costs paid by the seller are the real estate agent fee, the commission earned by the agent(s) who completed the sale. The brokerage fee currently averages about 6% of the purchase price in the US and — on paper at least — easily accounts for the majority of the closing costs a seller has to pay. In reality, realtor’s fees are usually factored into the selling price of the home and then deducted from that sale once the money has been transferred to the seller, so the case could be made that the real estate agent’s fees are actually paid by the buyer.
Other closing costs often paid by the seller include:
It’s entirely possible for various fees to be transferred from the buyer’s invoice to the seller’s or vice versa, generally depending on who has more influence over the sale. When the seller agrees to pay some or even all of the buyer’s closing costs, these are known as seller concessions. These tend to be more common at a buyer’s market when homeowners are looking to close the deal.
Like the real estate agent’s fee, seller concessions come from the home price and not the seller’s pocket, and some buyers will agree to a higher home price in exchange for seller concessions. But there are often limits to the amount of seller concession, depending on the type of loan and sometimes the amount of the down payment:
On a traditional loan with a down payment of 25% or more, a seller is entitled to cover up to 9% of the home’s purchase price in closing costs – but if the down payment is less than 10%, the seller cannot cover more than 3%. On the other hand, a government loan through the
What are typical closing costs?
As we mentioned earlier, the typical closing cost for a buyer is between 2% and 6% of the purchase price of your home – that is, if you are buying one
- house price
- Estimated deposit
- mortgage interest rate
Other online calculator can also ask for the loan type, the loan term and the zip code of the property.
The latter can prove to be a crucial factor – as with most aspects of the home buying process, where you live can have a big impact on your closing costs. In the first half of 2021, national average cost of closure for a single-family house (including taxes).
Your closing costs can also change depending on the type of loan you have, your mortgage lender, your credit rating, and more.
The good news is that whatever your closing costs, they shouldn’t come as a complete surprise, and certainly not on the day of the sale: lenders are required to provide a closing costs estimate along with their original credit estimate, which is required by law to give you within three days after receipt of your mortgage application.
This can help you not only know what you’re getting yourself into but also look around at different lenders who may have better deals. However, it is worth remembering that the key word is “estimate” – this is not a guarantee of closing costs, just the lender’s best estimate of what they will be.
How can I avoid closing costs?
A quick internet search to avoid closing costs will quickly lead you to what is called a free loan, but the name can be misleading. While a homebuyer who opts for a free loan may feel like they saved money on closing day by avoiding upfront fees, they’re not avoiding the fees entirely — they’re still paying closing costs, which are just wrapped up in the principal are the loan.
Lenders also often increase interest rates when they include closing costs in the loan, causing homebuyers to pay more (possibly much more) than the original closing costs over time. But for homebuyers looking to reduce their immediate expenses, a free loan can be a potential tool to make a mortgage more accessible sooner.
It’s worth noting that refinancers also have the option to include refinance completion costs in their loan; In general, the composition of closing costs for a purchase or a refinance looks similar. A key difference is that at the time of refinancing, a homeowner is likely to be refinancing a lesser amount than their original mortgage and the percentage of closing costs they pay will be adjusted accordingly.
How can I reduce closing costs?
While it’s difficult to avoid closing costs entirely, there are many ways you can reduce them. Here are some of the most common tactics to consider:
Consider different lenders: There is no reason to accept a lender’s first offer. Especially if you have strong credit and can afford a substantial sum of money deposit, you will find lenders competing for your business and may offer to lower or even waive interest rates and fees (e.g. loan origination fees or some refinancing costs). The loan estimate that lenders provide you with, including their breakdown of estimated closing costs, is an invaluable tool in helping you make an informed decision and even using certain offers as leverage for negotiations.
Negotiate with the seller: As we mentioned earlier, there’s always the possibility of seller concession, especially in a buyer’s market.
apply for cost aid: Some prospective homeowners, particularly those on low and middle incomes (depending on the cost of living in your area), may qualify for loans or grants from nonprofits, lenders, or local governments. These can cover down payments, closing costs, or both.
Choose your moment: Here’s another easy trick: try to time your closing for the end of the month so you don’t end up paying so much in prepaid interest before the first month of your mortgage begins.
While they may seem overwhelming at first, closing costs are ultimately like any other part of the home buying process: completely manageable. With a little research, planning, and friendly advice, you can avoid surprises, beat graduation day, and be enjoying your new home in no time.
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