If you’re a first time home buyer, you’ve probably heard the term closing costs, but you may have no idea what it actually means. For many homebuyers, closing costs is a vague term muddled among dozens of new legal details learned during the process. 

After all closing means when you finally get to seal the deal, so do you really need to worry about it now?

Absolutely. The best way to ensure your home purchase is going as expected is to gather enough information to recognize what should be happening during each part of the process. Understanding the details of closing costs and what will be expected of you as the buyer can shield you from any nasty surprises when closing day arrives.

What Are Closing Costs?

Simply put, closing costs are the fees paid by the buyer and the seller of a home to involved third parties on closing day. The process of selling and buying a home involves a significant amount of resources and interactions besides what occurs directly between the seller and the buyer. Closing costs pay all of the professionals who have been working behind the scenes to make the final agreement between a seller and buyer possible.

How Much Are Closing Costs?

When closing day arrives, you don’t want to be in for a nasty surprise that you haven’t properly prepared for, so it’s natural to wonder how much your closing costs will be. Without all of the details of your intended purchase, calculating an exact number for closing costs is impossible. Legal requirements vary from state to state and the final number will be dependent on the terms of your purchase. Generally, the closing costs for the buyer will be from 2% to 5% of the purchase price of the home.

If you already have a home price in mind, you’re probably doing the math and realizing this is a pretty big gap. For example, closing costs on a $200,000 home could be between $4,000 and $10,000. You’ll want a closer estimate than that, and you don’t have to worry, one will be provided before closing day arrives.

When Will I Know How Much to Pay?

Don’t worry, you won’t be slapped with a big payment you weren’t expecting when it’s finally time to close on your dream home. Shortly after applying for a loan, your lender will provide a loan estimate that explains the details of the loan you requested. This form includes financial details like the estimated interest rate, monthly payments, and closing costs. At least three days before closing, your lender will send you another form called a closing disclosure. This form outlines the final terms and costs of your mortgage loan. It is important to compare the closing disclosure with the original loan estimate. If you notice any discrepancies, talk to your lender about the reasons for the change.

What Closing Costs Cover

Since you’ve already taken care of a down payment and will be paying a monthly mortgage, you might be wondering exactly what you’re paying for when you have to fork over closing costs. You might be surprised to realize there’s plenty of additional costs you probably haven’t even thought about. Some closing costs are traditionally taken care of by the buyer, while other costs are covered by the seller of the home.

Buyer Costs

• Application processing fee: This fee pays your lender for the work done for your loan approval, like credit checks, pulling your credit score, and processing details.
• Origination fee: This fee covers the cost of the loan preparation from your lender.
• Appraisal fee: This fee pays to ensure your home isn’t wildly mispriced in the current housing market.
• Home inspection fee: This task is best covered before closing day. However, if it hasn’t been taken care of, you’ll want an inspection before you close.
• Tax service fee: Sometimes covered in the application fee, this payment pays for the cost of ensuring your tax payments are up to date.
• Prepaid interest: This fee covers the interest between closing and when you make your first mortgage payment.
• Mortgage insurance: This insurance is required if your down payment was less than 20%. Closing day cost will cover one month.
• Homeowner’s insurance: Homeowner’s insurance is required by law while you’re paying a mortgage. The amount you pay on closing day will cover your first year.

Seller Costs

• Real estate fees: This fee pays both the listing realtor and the buyer’s agent.
• Attorney fees: Sometimes, a seller uses the assistance of an attorney during the listing and sale of a house. These fees are paid on closing day.
• Transfer fee: This fee covers the cost of transferring the home’s title to the new owner.

How Can I Save Money?

Buying a house is likely the most expensive purchase many people make in their lifetime. After saving for a down payment and finally reaching a mortgage agreement you can afford, learning about additional costs can be difficult. The good news is, there are ways to money on closing costs. Here are a few ways to cut your costs.

• Compare costs when shopping for lenders.
• Close near the end of the month to save on interest costs.
• Look for a no closing cost loan. (The costs will be worked into your mortgage.)
• Ask the seller for help with closing costs. (A motivated seller may be willing to foot some or all closing costs to seal the deal.)

Buying a home is a major milestone. It’s a joyful time, but, understandably, there’s a lot of stress involved. Speaking with a good Loan Agent can help you be fully prepared and create good plan for success.  To get connected click on "Speak to A Loan Agent" on our home page.