If you’re buying a home for the first time, you’re going to be floored at how many new terms and concepts you learn about. You’re also going to be fairly surprised at the amounts of money that keep adding up. The price of the home itself is likely going to be several hundreds of thousands of dollars, but there are a number of additional things to think about, including PMI, mortgage points, insurance, taxes and closing costs.
Closing costs typically range from 2-5% of the purchase price
A lot of effort (i.e. cost) goes in to verifying that a home is available for purchase, that you have the means of making your mortgage payment, and that it’s a sound investment both for you and your lender. There’s also an astounding amount of work that goes in to writing and executing the contract thoroughly and accurately. Someone has to pay a lot of experts for a lot of their time, and that person is typically the buyer.
What exactly goes in to closing costs depends on where the home is, the type of loan (with VA loans, the seller pays a portion of closing costs), and what the lender requires. Here is a list of typical services that closing costs will cover:
- A fee for pulling your credit report and/or FICO score.
- A loan origination fee, charged by lenders for processing a ton of paperwork for you.
- Home inspections required by the lender.
- Underwriting fee, to cover the cost of evaluating a mortgage loan application.
- Discount points, or fees you pay to get a lower interest rate.
- Appraisal fee.
- Attorney fees.
- Pest inspection fee.
- Survey fee, to verify property lines.
- Title search fees, to pay for a background check on the property to make sure there aren’t liens from non-payment of prior mortgages and taxes.
- Title insurance, which protects the lender in case there are liens the title search doesn’t catch.
- Escrow deposit, which stores a few months worth of property taxes and private mortgage insurance.
- Recording fee, which is paid to a city or county for the work it takes to record the new owner.
How much will I pay in closing costs?
Closing costs generally amount to somewhere between 2 and 5 percent of the purchase price of the home. Assuming a purchase price of $200,000, closing costs could range between $4,000 and $10,000. On average, buyers pay roughly $3,700 in closing costs, according to Zillow.com.
Your lender is required by law to give you a good faith estimate of the closing costs on your home within three days of the loan application. But since this is just an estimate, the real cost could be thousands of dollars more than anticipated when you go to close. This is why a competent lender that you trust is crucial to saving you money.
Many of the closing cost fees are arbitrary, and frankly, negotiable. The good faith estimate of closing costs should be one of the criteria you use when deciding which lender to use, but be cautious–low price isn’t everything. A day before closing, your lender will give you a document called a HUD-1, which will outline actual closing costs. If this varies drastically from the good faith estimate, feel free to go get yourself a new lender, or at least threaten to until they honor their commitment.
Can I avoid closing costs?
You can reduce them by paying cash for your property–that will save you the loan origination fee, underwriting fees, mortgage discount points, and appraisal fees (Lenders will always require appraisals, but even if you don’t need a mortgage because you’re paying cash, you may want an appraisal anyway, for your own peace of mind).
You can also avoid paying closing costs at the time of purchase by getting a no-closing cost mortgage. This simply includes the closing costs in the total price of the loan, which will likely end up costing you more in the long run because you’ll pay a higher interest rate (unless you sell the house and pay off the mortgage within a few years).
Lastly, you might be able to get the seller to pay closing costs, since they’ll likely be flush with cash after selling, and you’re about to dropping thousands on a down payment. If the seller is willing to negotiate, whether because your generous offer price, the state of the market, or simply because they like you, you could wind up getting a little help. Remember, everything is negotiable (just about).