All You Need to Know About Closing Cost
Buying a new home is a super-exciting and super-busy time. There are many details and decisions involved in this purchase — and, of course, loads of expenses.
You've likely prepared for most of these expenses. Maybe you've been saving up for your down payment for many years and have set aside a few thousand dollars to help cover moving costs and furniture for your new home. While these are important, many people forget about budgeting for closing costs when saving up for a new home.
Closing costs include all fees incurred for officially transferring a property from one owner to another. The process is complicated and requires input from many professionals whom all need to get paid. Your closing costs help cover the salary of these workers.
Given all this, you may be wondering about your closing costs. What kind of closing costs can you expect on your home loan? Is there any way to lower these costs? What is a no-closing-costs mortgage?
So many questions — and we've got answers! Here's all you need to know about closing costs.
How high will closing costs be?
Closing costs are calculated as a percentage of the home's purchase price. This means the more expensive your home, the higher the closing costs. Since they are typically 2-5 percent of the home's worth, if you're purchasing a $130,000 home, your closing costs can be anywhere from $2,600 to $6,500. The final amount depends on local laws and taxes, the service fees of the professionals used, and various factors involving your home and property.
Your closing costs should not come as a surprise to you on the closing day. By law, your lender is required to provide you with a "good faith estimate" or a detailed list of your anticipated closing costs within three days of your mortgage application.
What kind of charges can I expect as part of my closing costs?
Here are some of the fees that may be included in your closing costs:
Application fee: This fee covers all administrative work required to process your application for a home loan.
Appraisal: This covers the fee of a professional appraiser who will provide your lender with an estimate of your home's actual value.
Attorney fee: In some states, the closing documents must be reviewed by an attorney before they become binding. This charge covers the attorney's fee.
Closing fee or escrow fee: This covers the cost of the title company, escrow company, or attorney for facilitating the closing.
Credit check: Some lenders charge a fee to examine your credit history.
Discount points: These optional charges can help you qualify for a lower interest rate on your loan.
Escrow deposit: You may be asked to make your initial escrow deposit at closing. This covers the first two months' worth of property taxes and mortgage insurance payments.
Home inspection: This covers the cost of a professional inspection of your entire home and property.
Homeowners' insurance: Many lenders require you to pay the first year's worth of homeowners' insurance premiums at the closing.
Lender's policy title insurance: This insurance assures the lender that you own the home, and the lender's mortgage is valid. It protects the lender if there is a problem with the title.
Origination fee: This helps compensate workers involved in marketing for the loan company and those who will help you with the borrowing process.
Pest inspection: Inspection for termites or dry rot is required in some states and for government loans. This fee covers the inspection.
Prepaid interest: Most lenders require buyers to prepay the interest that will accrue from the day of closing until the date of the first mortgage payment.
Primary Mortgage Insurance (PMI): If your down payment is less than 20 percent of the home's total value, you'll need to pay PMI until you own 20 percent of the house by market value. The first month's premium is due at closing.
Title fees: This covers the cost of a title search, in which your lender hires a title company to look for possible legal claims on the property you're purchasing.
Transfer taxes: This covers a tax for the transfer of the property's title from the seller to the buyer.
Underwriting fee: This fee goes directly to your lender. It covers the cost of researching whether you should be approved for the loan.
Should you choose the "no-closing-costs" option?
While a no-closing-costs mortgage sounds tempting, it's essential to understand what it means before going with this kind of loan.
First, there's no such thing as a mortgage without closing costs. You won't see these costs on a no-closing-costs loan, and you won't need to pay them upfront, but they do exist.
Second, a no-closing-cost mortgage generally means the closing costs are rolled into the mortgage, substantially raising the price of your home. You'll be paying interest on your closing costs throughout the life of the loan.
Finally, lenders usually raise the interest rates on no-closing-costs mortgages. That means you'll be paying more over the life of the loan than you would with other mortgage types.
Skipping out on closing costs might be advantageous in the short run, but it will have financial consequences which you'll be dealing with for years to come.
Is there any way to save on closing costs?
There are steps you can take to bring down your closing costs:
Schedule your closing at the end of the month. Part of your closing costs is prepaid interest charges on your mortgage for the remaining days of the calendar month. If you schedule your closing toward the end of the month, you'll only pay these charges for a few days.
Ask the seller to cover some of the costs. In a buyer's market, or if your seller is particularly eager to complete the sale, you can ask them to cover some of the closing costs.
Compare your good faith estimate and your final closing disclosure form. Check for inconsistencies and new charges. If something doesn't look right, bring it to the attention of your lender.
If you're in the market for a new home, don't forget to stop by Members Choice CU to learn all about our home loans.