As exciting as purchasing a home is, there's also a nagging feeling that you may be paying more than necessary in closing costs. These are the miscellaneous expenses you're expected to pay above the amount you're offering for the property. Most first-time homebuyers are unfamiliar with the fees included, and how much they will ultimately cost.
In this article, we'll provide a breakdown of the most common closing costs involved when buying a home. Realize that some are paid by the seller. It's also important to note that some lenders charge for items that others do not. Lastly, we'll offer a few suggestions for trimming the amount you're expected to pay.
How Much Can You Expect To Pay?
In most cases, closing costs will not exceed 5 percent of the selling price of a home. For example, if a listed property is selling for $250,000, these expenses may add up to $12,500. This percentage is on the high end; these costs often total 2 percent or lower.
The two largest factors are the loan origination fee and points on the loan. The former is a fee paid to the lender for creating the mortgage account. It can range between 0.05 percent to 2 percent. Points are a form of pre-paid interest. The borrower pays to reduce the interest rate applied to the mortgage loan. Each point paid reduces the rate by a certain percentage, which varies by lender. Points can represent between 0.05 percent and 3 percent of the loan, or higher.
What Items Are Included In Closing Costs
To a first-time homebuyer, these costs might seem excessive. Not only are the individual items costly, but there may seem to be an endless list of them. Common items include fees for an appraisal, home inspection, courier services, recording of documents, and a fee to check your credit rating. Underwriting and application fees are also applied. Large items include title insurance, a real estate lawyer's fees, and PMI (private mortgage insurance).
Many expenses, especially the smaller ones, vary by lender. For example, one lender may include the cost of a notary while another may not. One lender may charge $600 for an appraisal while another charges $350. These and other areas give the borrower room to negotiate for a better deal.
Buyer Versus Seller Closing Costs
Earlier, we mentioned that some closing costs are paid by the seller while others are handled by the buyer. For example, the seller usually pays for title insurance while the buyer pays escrow fees. The seller usually covers the cost of a home warranty while the buyer pays for fire and flood protection. Recording and notary fees are paid by the homebuyer while city and county transfer fees are absorbed by the homeowner.
It's important to realize that few items are set in stone. Nearly all of them can be negotiated between sellers and buyers if the lender agrees to it. In a buyer's market, a motivated seller may be willing to absorb some of the closing costs in order to accelerate the transaction.
Ways To Reduce Your Closing Costs
The most effective way to lower your closing costs is to compare them between lenders. If several mortgage companies are willing to extend the same sized loan at the same interest rate, use closing costs as the deciding factor. Also, don't merely compare the fees. Try to have them lowered or eliminated. Some, such as that for a title search, are firm because they are transferred to a third party. Others, such courier fees, are usually kept by the lender, and thus can be negotiated.
Another tactic is to make sure the mortgage company knows you are willing to walk away if they cannot meet your requirements. Many lenders will be willing to work with you rather than risk losing your business to a competitor.
Depending on the price of a home, closing costs can be expensive. Familiarize yourself with the items included, and where possible, try to negotiate with the seller and lender.
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