Understanding Closing Costs and Fees

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According to Zillow, closing costs range between two and five percent of the purchase price of the home, with the average amount buyers shell out being close to $3,700. That’s a lot of money out of pocket. Understanding closing costs and fees can help you plan ahead when buying a home and potentially save on some of these expenses.

What Are Closing Costs?

Closing costs are exactly that—the fees you pay to close the deal on a home purchase. These expenses have to be settled at the time the actual purchase transaction takes place—that’s when you sign on a whole bunch of dotted lines. Once closing occurs, the title of the home transfers from the buyer to the seller, and this may also be when you get your keys. You may also pay closing costs when refinancing your home or taking out a home equity loan.

How Much Are Closing Costs?

Closing costs vary according to numerous factors, but one of the most important is the purchase price of the home or the amount you’re financing for it. If closing costs are two to five percent of the purchase price, here’s a glance at what you might end up paying to close the deal on new homes of various values.

• $100,000 home = $2,000 to $5,000
• $200,000 home = $4,000 to $10,000
• $300,000 home = $6,000 to $15,000
• $400,000 home = $8,000 to $20,000
• $500,000 home = $10,000 to $25,000

The Buyer vs. the Seller

Before you write off purchasing a home in the near future because you can’t afford the closing costs, consider some good news. Often, sellers are willing to negotiate regarding closing costs and might cover some or all of them. This is often done via seller concessions. Here are a couple examples of how you might get sellers to cover closing costs.

• You may find something that needs fixing in the house but isn’t an immediate concern. You point this out to the seller and ask them to give a concession—pay you the money at closing that it would cost to make the repair. That money might help you cover closing costs.
• You may be able to negotiate the price of the house down to cover closing costs. For example, if the seller wants $100,000 for the house and closing costs would be $5,000, negotiate for the seller to pay closing costs out of the home proceeds. You still pay $100,000, but the seller turns around and pays $5,000 in closing costs for you. Ultimately, this means the seller agreed to sell the home for $95,000.

Fee Breakdown

Here are some fees and expenses that might be involved in a mortgage or home purchase. Some are part of the closing costs while others are separate.

• Loan origination fees: A fee charged by the lender for the evaluation and preparation of your loan.
• Discount points: Prepaid finance charges lenders may require you to pay at closing to reduce interest rates. One point equals one percent of the loan, so on a $100,000 home loan, one discount point would cost $1,000.
• Application fees: The initial costs of processing the home loan application.
• Credit report check: A fee to cover the cost of checking your credit.
• Documentation fees: Fees to cover activities such as processing, underwriting and the preparation of documents.
• Inspections: Lenders may insist on a home and pest inspection.
• Appraisal fees: Homes typically have to be appraised before the lender can proceed with the loan application. The appraisal determines the market value of the house.
• Homeowner’s insurance: Most lenders require that you purchase homeowner’s insurance, and some require that the cost be part of your monthly mortgage payment.
• PMI, or mortgage insurance: This fee can kick in when you contribute a down payment of less than 20 percent of the home’s value. In some states, the insurance is mandatory. Typically, you pay PMI via your mortgage payment, and the funds are held in escrow until the payment is made.
• Attorney fees: If you have an attorney represent you when you’re buying a home, you will need to cover his or her fees.
• Taxes: You may need to pay part of the property taxes at closing.
• Daily rate of interest: This fee, calculated by your closing date, takes care of the loan interest from the day of closing through the end of the first month. It is paid to your lender.
• Survey costs: Lenders may require a survey of property.
• Title fees: A title search must be performed to ensure there are no liens or other issues with the title that would make it impossible for you to buy the property.
• Title insurance: This insurance protects you and the lender from any mistakes made by the title company during the title search.
• Recording fees: This fee, charged by the title company, covers the cost of recording the transfer of the title at the county clerk’s office.

Can Any Closing Costs Be Avoided?

You can avoid some or all closing costs in a few ways, but that’s not guaranteed. As mentioned above, you can attempt to get the seller to pay some or all of the costs. Often, that just involves concessions that move the expense to a future date.

For example, if you pay $100,000 and the seller agrees to accept $95,000 and use the other $5,000 to cover closing costs, you’re still borrowing $100,000. You’ll be paying that $5,000 plus interest back over the life of the loan. Yet, this might be an option if you have everything covered for a mortgage except the closing costs.

You may be able to reduce some closing costs. For example, the daily rate of interest fee is the interest between the closing date and your first monthly payment. Closing at the end of the month can reduce that amount somewhat because there is less time between those two dates. You may be able to avoid expenses related to PMI by putting 20 percent down, too.

How to Prepare for Closing Costs

Chances are, you’re going to have to pay at least something in closing costs. Here are a few tips for preparing for them.

Get a Mortgage Preapproval

Plan ahead by knowing how much mortgage you can afford and qualify for. Getting a preapproval also helps you understand if your credit is good enough for the mortgage you want.

Specifically Budget for These Fees

Once you know how much house you can afford, decide on a budget for your new home. If you decide you will spend up to $200,000, try to budget for the maximum amount closing costs might add up to. If you end up with extra money after you finalize the purchase, that’s great. You can use it to help furnish your new home or save it for a rainy day.

If you check your credit to prepare for applying for a mortgage and find a negative surprise or two, don’t set your homeownership dreams aside. Instead, consider working with the team at CreditRepair.com to get your credit history back on track so you can qualify for a mortgage in the future.