When you’re buying your first house, it’s important to know what closing costs to expect in addition to your down payment. These costs vary depending on your location, so be sure to talk to a real estate agent or mortgage broker for more specific information. Here are some things to think about regarding closing costs for first-time homebuyers.
What Are Buyer Closing Costs?
Closing costs in real estate are the fees and expenses you pay when you close on a property. This can include everything from the loan origination fee to inspections, home appraisals, and more.
Closing costs are not usually included in your home loan. This means that you’ll need to bring money to the closing table to cover these costs. There are exceptions, though. However, if a lender agrees to encompass your closing costs into your loan, you’ll pay thousands of dollars of interest on that money over the next 30 years.
How Much Are Costs?
Closing costs can vary widely, but they typically range from 3-7 percent of the purchase price of your home. This means that if you’re buying a house for $200,000, you can expect to pay between $6,000 and $14,000 in closing costs.
Are Closing Costs Tax-Deductible?
The answer to this question depends on whether or not you itemize your deductions when you file your taxes. If you do itemize, then many of the costs associated with purchasing a home, such as a loan origination fee, processing fee, underwriting fee, and credit check, are tax-deductible.
Who Determines Closing Costs?
Your home mortgage lender is the one who projects and finalizes the closing costs on your real estate transaction. They will give you a “Good Faith Estimate” of what to expect, but the final costs, of which you’ll be notified three days prior to closing, could be more or less depending on the actual lender fees and other factors.
The majority of these costs are associated with the lender, such as the loan application fee, loan processing fee, underwriting fee, and more. By comparing lenders, you’ll be able to gauge what’s fair for closing costs. And, if you’ve got good credit history and a good down payment, you may be able to negotiate closing costs with the lender of your choice.
Can You Negotiate Closing Costs with the Seller?
It’s not always possible to negotiate with the seller on closing costs, but it can’t hurt to ask. If the seller is motivated, they may be willing to help you out, especially if you’re already paying close to their asking price. Keep in mind, though, that the seller has their own closing costs to pay – and in a buyers’ market, asking the seller to pay closing costs could be a deal-breaker.
How Loan Types Affect Closing Costs
There are various types of loans that could influence your closing costs. The most common is the conventional home loan, but VA loans for military members and their spouses, as well as FHA loans backed by the Federal government for people with lower incomes or compromised credit, can reduce or eliminate closing costs altogether.
Ways to Lower Closing Costs
Close at the right time: If you’re able to, close at the end of the month. This way, you won’t have to pay as much in prepaid interest.
Get a no or low-closing-cost loan: These loans may be available from some lenders. However, keep in mind that you’ll probably pay a higher interest rate on the loan.
Choose a lower loan term: A shorter loan term means you’ll pay less in interest over time. You can select a 15-year mortgage instead of a 30-year mortgage.
Make a bigger down payment: A larger down payment can help lower your closing costs.
Ask for lender credits: You may be able to get the lender to credit you for some of your closing costs if you’re willing to pay a higher interest rate on your loan.
Shop around for a lender: Different lenders will charge different fees. By shopping around, you may be able to find a lender with lower closing costs.
Common Closing Costs
Closing costs vary among states, but there are several that are common in home mortgage loans. Closing costs might include but are not limited to:
Loan application fee: This is the fee a lender charges to process your loan application.
Credit check: A fee to check your credit score.
Processing fee: A fee to cover the costs of processing your loan
Underwriting fee: A charge for underwriting or the process of reviewing your loan application.
Loan origination fee: The fee a lender charges for making the loan. This is typically one percent of the loan amount.
Real estate attorney: Some states, but not all, require that a real estate attorney be present at the closing.
Escrow: This is a fee charged by the escrow company to hold and manage your funds during the closing process.
Title search: This is a charge for the title company to research the history of the property’s title.
Title insurance: This is a type of insurance that protects you from any financial losses that may come as a result of problems with the title.
Appraisal: A fee for the appraiser to estimate the value of the property.
Home inspection: A fee for the home inspector to check for any problems with the property.
Survey: A fee for a surveyor to map out the property boundaries.
Property taxes: The taxes you will pay on the property from the time of purchase until the end of the year.
Transfer tax: A tax charged by some states on the sale of a property.
PMI: Private mortgage insurance, which is a fee charged by the lender if your down payment is less than 20 percent.
Homeowners’ insurance: The insurance you will need to protect your property from damage.
Flood insurance: If your property is located in a flood zone, you’ll need to purchase flood insurance.
Fire insurance: You may need to purchase fire insurance if you live in an area at high risk for fires.
HOA dues: If the property is located in a community with a homeowners’ association, you will be responsible for paying HOA dues.
Points: You may choose to pay “points” to lower your interest rate. One point is equal to one percent of the loan amount. It’s prepaid interest.
Courier fee: This is a fee for the lender to send your loan documents to and from the closing.
Wire transfer fee: A fee for the bank to wire your funds to the closing company.
Rate lock fee: A fee charged by the lender to lock in your interest rate for a set period of time.
Recording fee: A fee charged by your county to record your mortgage documents.
Document preparation fee: A fee for the company that prepares your loan documents.
Notary fee: The fee charged by the lender’s notary public to witness the signing of your loan documents.
Closing costs can add up to several thousand dollars, so it’s important to understand what they are and how you can reduce them. By shopping around for a lender, making a larger down payment, and asking for lender credits, you may be able to lower your closing costs.
To learn more about closing costs and how to reduce them, talk to a qualified mortgage professional or your local professional real estate agent.