Everything you need to know about closing costs

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When you’re shopping for a home never assume that the price of a property is what you’ll actually pay to make the purchase. Yes, the final price is subject to negotiation, but you also have to keep closing costs in mind.

What are closing costs? They are the assorted fees and charges that can add a substantial amount to the final price tag for your new home, particularly if you’ve applied for a mortgage.

Here’s what you need to know about closing costs to understand how they will affect your homebuying experience.

What are closing costs?

The precise mix of fees and other charges included in your closing costs will depend on where you live, what type of loan you have and what sort of property you’re buying. These costs don’t include any down payment amount you’ve agreed to pay, although that amount is typically paid at closing. Some examples of different closing costs you might see include:

  • Appraisal fees
  • Credit check charges
  • Home inspection fees
  • Loan origination fees
  • Title search fees
  • Deed-recording fees
  • Attorney fees
  • Homeowner association transfer fees
  • Property transfer taxes
  • Fees for additional inspections focused on lead-based paint, pests or other specific concerns

These closing costs are ultimately the buyer’s responsibility, but often buyers and sellers negotiate an agreement where the seller covers specific costs or may offer a set amount to offset all or part of the buyer’s closing costs. It depends on the market and who is more motivated, you or the seller.

Tracking your closing costs

Within three days of submitting your loan application, your lender must provide you with a good faith estimate of your potential closing costs based on the specifics of your situation. This estimate gives you a rough idea of what to expect, but there could be many factors that affect closing costs before you actually close on a home. You’ll receive a new document known as a “closing disclosure statement” three days before your actual closing date that lists the real costs.

When you receive this closing disclosure statement, make sure you compare it to the earlier estimate. Generally, there should be no major surprises at this point. However, if there are significant changes you don’t understand, ask your real estate agent or lender for an explanation.

How much you’ll pay

On average, closing costs for the buyer range between 2 percent and 4 percent of the price of a property.  So, if you are purchasing a home for $300,000, the closing costs are likely to add $6,000 to $12,000 to the final price tag. Closing costs vary significantly by region, however, so it’s worth taking a look at Bankrate’s breakdown of average closing costs by state.

Minimizing the amount you pay

Closing costs are typically paid on your closing day.  However, your lender may provide you with the option to include these costs in your mortgage loan, allowing you to lower the amount you’ll pay upfront for a home. Doing so will cost you more over the long run, though, since you’ll pay additional interest on the extra money you’re borrowing. Similarly, you may be able to negotiate with the seller to have them cover a greater share of closing costs, but that is likely to result in a higher overall closing price.

Preparing for closing costs is a crucial step in the homebuying process. Taking a close look at your expected closing costs and tracking how those numbers change over time is sure to help you make a more informed and confident decision.