During the home buying process, there will probably be a few large numbers swirling around in your head, like how much to save for a down payment and how much your future monthly mortgage payment may be.
There’s another number you may want to add to the mix: closing costs. These are a little harder to predict than a monthly mortgage payment (we explain why below). Yet closing costs can be as important when looking at houses as mortgage payments, because they could add up to thousands of dollars. But – bright spot alert – you may not have to pay for all of them.
Clear as mud? Yeah, for us too, so we dug in. Below, we try to end some of the mystery of closing costs by going over the basics.
Closing costs are fees lenders, title agents, closing attorneys and others folks who need to be involved charge to process a mortgage and the sale of the home. They can be 2% to 5% of the home’s purchase price.
If your new home costs $400,000, closing costs could be anywhere from $8,000 to $20,000 . That's a pretty big range, but it's because the exact costs will depend on several factors, like your location, lender and loan.
While this isn’t a full laundry list of what to expect (ask your realtor, lawyer and/or lender for the full details), these are some of the fees you will probably see.
If you plan on getting a mortgage, closing costs pay for the lender’s work to initiate, review and process your loan. Your lender will provide a Loan Estimate or Closing Disclosure form which will include loan information – like your monthly payment – as well as:
The disclosure form may also include some of the fees we list further down. (If you’d like a preview, the Consumer Financial Protection Bureau has this example.)
Is there wiggle room? Maybe. Some fees, like the origination fee, may be avoidable or negotiable. Others, like the appraisal and credit-report fee, are often needed to process a loan.
Any other lender fees to be aware of? Your lender may also set up an escrow account to hold about two months of property taxes and homeowner’s insurance premiums. If they do, these will also be due at closing, increasing the amount of money you’ll want on hand.
Even without a mortgage, you may still be on the hook for closing costs, because they also include fees for services that may be required (or recommended) before you purchase your home. They could include these three:
Your municipality may also charge fees before a real estate transaction can occur. These can include:
You may be dreading the fact that you’ll have to part with not just your down payment money, but additional money on top of that to close on a home.
The good news: Just like you may be able to negotiate an application fee with your lender, you may be able to negotiate and have the seller to contribute to your closing costs, among other concessions – especially if the seller is eager to close the deal. Your real estate agent or broker could help you explore your options before your home search and before you submit a purchase offer.
As their name implies, most closing costs are paid on the day you close on your home. In many states, closing day is when funds are transferred from the lender (or from you, if you’re paying all cash) to the seller. And it’s usually also the day when you receive the keys to your new home.
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