Closing costs represent the frequently overlooked amount of money associated with buying a house, mortgage-related fees, property-related fees, and closing documents. These are thousands of dollars in fees, typically adding up to 2-5 percent of the loan principal. Various closing cost components exist and usually vary from country to country, while the borrower can negotiate some of these closing-related costs. All of the costs associated with closing a real estate transaction are just as important as down payment. They should be considered and added to the closing price of the transaction.
What Are Closing Costs And How Do They Work?
Closing costs include an appraisal, title search, credit check, how much you’ll have to pay depends on numerous factors, some of them being the location of the property and the home price. All of the closing costs are broken down into two groups, property-related fees, and mortgage-related fees. The first covers the expenses associated with your lender evaluating the property you’re about to finance. The second covers the expenses of application processing.
- Appraisal fee: It covers the costs of an authorized professional who has the job of determining the home’s worth before a lender extends a mortgage offer. Price estimates of a single-family home typically ranges from $300 to $450, while larger homes might have higher fees.
- Home inspection fee: Apart from hiring a professional for the appraisal, you should also consider hiring a professional inspection of the property you’re buying, which also costs a few hundred dollars.
- Title search: Lenders will usually hire someone to search local property records, to make sure there are no issues with ownership. This fee costs around $450.
- Title insurance: Lenders usually require title insurance in case some issues pop up regarding the ownership after the sale. This serves as protection for the lender and it usually costs somewhere between 0,5 to 1 percent of the loan amount. Homeowners may obtain title insurance to protect their financial interest in the named property, which is an additional cost.
- Credit report fee: It is a number the lender must charge to check your credit score and acquire a credit report; the fee is $25 or more.
- Origination fee: This fee might apply sometimes and it regards the initiation of the loan; it ranges up to $125.
- Application fee: Some lenders charge several hundred dollars for the processing of the application fee.
- Underwriting fee: This is also known as an administrative or processing fee. It regards the verification and the evaluation of the mortgage. It might be around 0,5 percent of the entire loan amount. Some other charges are implied as well, also known as points and they are paid upfront. A large number of mortgages give the borrower an option to pay points to lower the interest rate on the loan.
- Local fees: Additional charges might exist in certain cities or states which do not apply in others. Be sure to do the research before going into the buying process.
- Legal fees: A lawyer is a definite necessity in this process and for most property deals, you will need to be represented by a lawyer at your closing. Real estate lawyers usually charge by the hour, and the rates vary broadly.
After applying for a mortgage, you will receive a loan estimate and a closing disclosure from the lender. The loan estimate serves as the evaluation of all mortgage-related costs, including your payment taxes, closing costs, and insurance with other home-related expenses. After settling on a lender, you’ll receive a closing disclosure that provides almost the same data as the loan estimate. This will include the exact numbers that can be expected for pay out at the closing and afterward. These two documents are the most valuable when it comes to knowing and understanding closing costs.
Paying some of these fees is inevitable, but there are some you can negotiate, which will save you some money. Many of these fees are not invariable, the lender has the ability to adjust them, according to agreement; the only thing you need to do is ask for each of them individually. If it’s unclear what a specific fee covers, ask the lender for the specific numbers or if it doesn’t make sense, for the fee to be waived.
The answer to who pays the costs, traditionally, the buyer pays most of the fees, while the seller covers some; you can negotiate some of these, depending on the market. It is not unusual for the buyer to persuade the seller to split some expenses that are paid in advance. These usually include tax, flood and hazard insurance, property taxes, and others. If selling the house is urgent, the seller might be willing to pay more of the closing costs. The key is to be patient, very thorough with the research, and cautious when estimating closing costs, considering that buying a house is lengthy and not a simple process. If it seems too complicated for you, be sure to contact a professional, to help you figure out the numbers.