If you’re wondering “What are the average closing costs in my area?” or “What will my closing costs be?” you’re not alone. These costs can significantly affect how much you need to save in addition to your down payment before going home shopping.
What Are Closing Costs?
Closing costs include all of the various fees, taxes, and charges that home buyers can incur during the sale of a home. Some are fixed costs, like a home appraisal, inspection, and title fees. Others may be derived from fees your lender charges, which are up for negotiation, or costs you can convince the seller to pick up when you close the deal.
What are the average closing costs?
On average, closing costs can total anywhere from 2% to 4% of your purchase price. For a $200,000 dollar home, if you can put 20% down ($40,000), your loan will be $160,000. This means you can count on closing costs being anywhere from $$4,000-$8,000 including reserves for property taxes, homeowners insurance and daily interest.
What do closing costs include?
Closing costs can include any or all of the following:
- Loan Application Fee – For a conventional, FHA or VA loan, an Application Fee is considered a junk fee and something you should request to have waived if your lender tries to charge one.
- Attorney Fee – Many states require an attorney to handle and be involved in the loan closing. If you are in a state that uses an escrow company to handle closing, you still have the option to hire an attorney to review the paperwork for you. This is advisable if you are purchasing a bank-owned home, a home with structural damage, or a home from an estate. Bottom line: for any property purchase that is outside the scope of a standard transaction it’s advisable to have a Real Estate Attorney for your protection.
- Escrow Fee – An Escrow Company is paid to handle closing in states that don’t require an attorney. They handle the disbursement and transfer of funds between all parties.
- Courier Fee – Digital signings don’t incur this fee. It only applies to physical documents and is often lumped into the total cost of the escrow closing fee.
- Credit Report Fee – Your lender will charge a fee to pull your credit report. Typically they will ask for a credit card number so they can complete this step immediately.
- Escrow Deposit – You’ll need to put two months of property tax and mortgage insurance payments in escrow, plus any months needed to catch up the escrow account so the lender has the full payment available the next time the premium is due.
- Discount Points – Each point = 1% of the loan amount, which is used to reduce the interest rate. Generally 1 point can get you around a .25% reduction in rate, but this can vary depending on the mortgage backed securities market.
- Loan Origination Fee – Some lenders will charge a 1% fee as an administrative cost. This is negotiable and not something that should be paid on mainstream loans like conventional, FHA or VA loans.
- Home Inspection Fee – A home inspection is for your protection to make sure there are no unseen issues with the home. This is not required by the lender but highly advisable. An inspection is generally done shortly after the contract is accepted.
- Property Appraisal Fee – An appraisal is typically required by the lender. It determines the home value and your loan to value (LTV) ratio, which can affect your down payment and interest rate.
- Property Taxes – This can vary by state, but generally a buyer has to pay the prorated taxes for the billing period they purchased the home.
- Recording Fee – This covers the cost of recording public land records by the city or county.
- Survey Fee – This covers the cost of verifying property boundaries, and is most commonly required on construction loans.
- Title Search Fee – This covers the cost of searching and insuring deed records to identify disputes or liens. In most states the buyer pays the lender’s title policy while the seller pays the owner’s title policy. Regardless of who is required to pay the owner’s title policy, the fee has to be disclosed on the Loan Estimate.
- Title Transfer Tax – This covers the cost of transferring the title from the seller to the buyer. In some states this is paid by the seller and in others it is paid by the buyer.
- Underwriting, Processing or Admin Fees – These “lender fees” are charged by the lender to cover the cost of the underwriting and processing the loan. These fees can vary greatly from lender to lender.
Your closing costs may be covered all or in part by your earnest money, which is credited back to you at closing.
What will my closing costs be?
You should receive a detailed statement of your closing costs in a Loan Estimate within three days of applying for a loan. A Loan Estimate is a standardized form that all lenders must use, and is intended to make comparing loan offers easier for a consumer.
Three days prior to signing your final loan documents a Lender is required to provide a final Closing Disclosure that lists the final costs you are paying and how much you’ll have to come up with at closing.
Any discrepancies in your final Closing Disclosure compared to your Loan Estimate must meet government set tolerances, or there must have been a valid Change of Circumstance in your loan structure that warranted and adjustment to the costs. If you see discrepancies, contact your Loan Officer right away, as they should be able to assist you in understanding the forms.
The above figures aren’t set in stone. You can often negotiate closing costs to make your new home more affordable. The lender might knock off some fees, or pay them for you. You could get the seller to cover some of the costs as part of your deal.
You might qualify for some sort of assistance to get your closing costs paid. Examples include negotiating with the seller to provide a credit towards costs or utilizing a lender credit in exchange for a slightly higher rate to help cover your costs.
Always remember to start discussing closing costs early in the home buying process. You may be able to negotiate with sellers and lenders to have costs covered, or find other ways to reduce your costs at closing.
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