In a real estate deal, homebuyers’ closing costs are fees added to the price of the home or property.
So, what are closing costs specifically?
These extra charges include appraisal fees, origination fees and survey fees, as well as title insurance and deed-recording costs, among others, and usually equal 2 percent to 5 percent of the home’s purchase price.
While closing costs vary by lender and by state, here are some of the main fees that are attached to a real estate transaction.
Origination fees are costs that the lender assesses for creating the loan. These are some of the costliest fees incurred, as the lender typically charges 1 percent of the mortgage value.
In addition, banks often charge to run your credit report and to process your loan application. However, these fees are often negotiable.
Title insurance and appraisal
Title insurance protects you and the lender from previous legal claims against the property. Title insurance costs about $1,000.
The appraisal fee covers the cost of an appraiser to evaluate a house and estimate its market value. It is often something you pay at the time the appraisal takes place and not at closing. Expect for the appraisal to cost around $400.
Government and other fees
Recording fees are charged by the county government to register the real estate transaction.
For the buyer, property taxes from the date of closing until the end of the year are levied since the seller has likely paid the taxes up to closing. These fees and taxes vary by county.
If your loan closes mid-month, you may be asked to pay accruing interest between the closing date and the first date of your mortgage payment.
Your rights regarding closing costs
Lenders are legally obligated to provide you with a loan estimate that outlines the closing costs for the home. This is usually provided within three days of receiving the loan application.
At least three days before you close, the lender should provide you with a closing disclosure statement, detailing your closing costs.
The closing costs that appeared in your loan estimate may be different from the closing costs detailed in the disclosure statement because the fees may change from the time the initial estimate was made.
Be sure to read these documents carefully, inquire about fees you don’t understand and ask about discrepancies between the estimated cost and the actual costs.
An alternative to paying closing costs is a no-closing-cost mortgage.
Buyers often have two choices when paying closing costs. They can pay them upfront at the time the sale closes, or they can opt for a mortgage with which the lender pays the closing costs but charges a slightly higher interest rate in exchange.
No-closing-cost mortgages are an appealing option for buyers who don’t have the cash to pay the closing costs upfront.
To be sure, no-closing-cost mortgages may save you money if you don’t plan to stay in the home for more than five years. That’s because it often takes the lending company more than five years to make up for those closing costs.
Reduce your closing costs
Closing costs can total several thousand dollars, but you may be able to lower them.
While you won’t be able to negotiate to reduce government fees, you may be able to lower your lender’s fees. Ask your lender if it will waive any portion of its fees such as application fees or processing fees.
While your lender may have preferred providers, such as a preferred title insurance company, you have the option of shopping around for the best rates and choosing a company with lower fees instead.
When you’re negotiating the purchase of the home, you can ask the sellers if they’ll lower the sale price to offset some of the closing costs. And, by delaying your closing to the end of the month, you can minimize prepaid daily insurance charges.