You’ve almost crossed the finish line of your new home purchase and are ready to move in! But first, you need to settle up the costs and pay for the property — and you’ll do all this at closing.
Here’s more on what closing costs entail, what you can expect to pay as a buyer, and what you can negotiate.
What are closing costs?
Closing is when the sale of a home is final, all finances are settled, and ownership is officially transferred from the seller to the buyer. For a seller, this means they’ll pay their real estate agent’s commission, any prorated taxes, bills, and the remainder of their mortgage balance, as well as fees related to the sale. The remaining balance will go in their pocket as proceeds on the sale.
Generally, as a buyer, you should expect to pay somewhere between 2% and 5% of the purchase price in closing costs. The bulk of a buyer’s closing costs are related to their new mortgage — like origination points, escrow, and an appraisal for the lender. Just like the seller, you’ll also pay fees related to the sale — generally, these are split 50/50 between the buyer and the seller.
There is room for negotiation in anything split between the buyer and the seller. However, in a seller’s market, like now, it can be much more difficult to convince a seller to concede for paying more in closing. The exception would be if you accepted more in closing costs in exchange for not asking for repairs, etc. Or, you can even try to sweeten your deal to the seller by offering to pay for more than your fair share of closing costs.
Here’s what you can expect to pay for buyer’s closing costs when purchasing a new home.
Mortgage-related costs are generally non-negotiable, but you can search around to find the lender with the best rates and the lowest fees to ensure you get a good deal.
Most lenders charge an application fee when you submit an application for a loan. On your paperwork, you may see this include an appraisal fee that ensures the property is worth a certain amount and that the bank is making a solid loan. An appraisal is similar to a home inspection but is less in-depth and is done for the purpose of the lender. A mortgage application fee may also have a credit report fee lumped in, which pays for the lender to request your credit report.
Escrow accounts are common when buying a home and are essentially an account where money for future property taxes and homeowner’s insurance is held by your lender. The lender wants to ensure you have enough funds available to cover those costs and ensure a solid investment. They will often ask for a full year’s worth of insurance paid at closing, plus another several month’s worth of premiums. At closing, the seller usually pays a prorated amount for property taxes during the time they lived in the home (since most state’s property taxes are paid in arrears). You’ll then hand this money over to your escrow account, along with another several months’ worth of property taxes. After that, smaller monthly payments for these services will be included into your full mortgage payment.
A loan discount fee is optional on your mortgage. You may pay what are called “points” to your lender to lower your mortgage interest rate. Each point you purchase equals 1% of the total loan. This fee is a one-time charge from the lender that you pay at closing. You may or may not opt for a loan discount, and your lender may or may not offer it based on your credit and history.
Loan Origination Fee
Because a lender needs to complete loads of paperwork to process your loan, they charge an origination fee to cover this cost. This fee is typically 1% of the total mortgage amount and is included in your closing costs.
It is typically advised to pay 20% down when purchasing a home. However, certain loans allow you to pay less out of pocket in exchange for purchasing monthly mortgage insurance. Private mortgage insurance (PMI) protects the lender with insurance in the case you aren’t able to maintain your monthly mortgage payment and your home is foreclosed on.
Once you’ve reached 20% equity, you may be able to apply to stop paying this insurance fee. Be careful, though: There is an additional fee for the application, and you may have to pay out-of-pocket for a new appraisal. Your PMI usually falls off automatically after you reach 22% equity, so this may be cheaper in the end. Check your specific mortgage agreement for specifics.
Prepaid Interest Fee
Mortgages are usually due on the first day of the month. If you close mid-month, you may need to pay prepaid interest to your lender, as your first full mortgage payment may not be due for several weeks.
An underwriting fee is another charge from the lender to cover their time and costs in determining whether to approve your loan.
If you ordered a home inspection on your new home, you may have paid for it upfront, or you may have had the option of settling the bill at closing.
Settlement or Closing Fee
You, the seller, and your agents likely rely on a title company to oversee the sale as an independent party. Thus, they charge a settlement or closing fee.
Title Search and Title Insurance Fees
Title insurance is the title company’s promise that they have done a thorough search on the property you are purchasing and have found no liens or other stipulations on it. They also ensure that the seller actually has a right to sell it. Title insurance fees are charged by the title company to cover the title search, title examination, title insurance, document preparation, and other miscellaneous fees.
When buying a home, the seller typically pays for the owner’s title insurance, which is a percentage of the purchase price set by the local municipality or state. The buyer pays the lender’s title insurance to the mortgage lender, which is a percentage of the amount borrowed. Both policies cover the owner or lender against future claims on the title.
We can’t forget about taxes! Transfer taxes may also be referred to as recordation taxes, stamp taxes, or grantee taxes and are usually split 50/50 between the seller and buyer, vary by state, and are a percentage of the purchase price.
Lean on your agent
While all this may sound confusing, you can lean on your real estate agent throughout the process to help you understand your closing costs. You’ll also receive a Closing Disclosure Form that outlines all the final estimates related to your loan. During this process, the title company can also walk you through these final steps before receiving the keys to your new home!
For more tips on real estate buying, check these posts out.