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How Much Will You Pay in Closing Costs and What Are They?

Friday, November 4, 2022   /   by Laura Larson

How Much Will You Pay in Closing Costs and What Are They?

It's simple to get carried away with the enthusiasm of making plans for your new space if you're a first-time home buyer. You're probably closely monitoring interest rates and your upcoming mortgage payment in addition to daydreaming about paint schemes, furniture arrangement, and the ideal design for your new home. However, there are other transactional aspects that are simple to ignore, including the plethora of extra fees and expenditures that buyers must pay when buying a home. Closing costs are these additional charges.

What fees apply to closing?
Your lender will give you a closing disclosure to consider as the closing date draws near. You might be seeing an itemized list of one-time costs for the first time in addition to your down payment on closing day. The many parties involved in transferring ownership of the home from the previous owner to you are compensated by these typical closing fees. It's crucial to check this declaration for accuracy and comprehend the different fees. Before the agreement is final, now is the opportunity to ask any questions. For your convenience, below is an example closing disclosure.

What does a closing disclosure include?
Your disclosure will itemize your loan terms and the breakdown of the purchase price, principle, interest, payment amounts, and any fees associated with securing the loan. Capital Funding Financial shares a list of typical charges you’ll see on the closing disclosure:

Lender Origination Points (often 1% – 3% of the loan amount)
Buydown Points (any fee related to “buying down” or “lowering” the interest rate below PAR)
Third-Party Fees (such as the appraisal, title policy, taxes, credit report fees, survey, and HOA fees)
Prepaid Interest
Taxes owed to the City or County
Escrows required by the lender
Property Insurance (Flood, Liability, Hazard, depending on where the property is located)

Make sure you comprehend the arithmetic and perform a self-check to confirm the figures. No matter how knowledgeable and skilled your lender's team is, mistakes still occur occasionally.

The example closing disclosure statement demonstrates how the sums can be substantial enough to cause you to scramble at the last minute if you are unprepared. Although your lender should give quick and accurate estimates, you can get a head start by making your own estimates so you'll know exactly what to anticipate.

Who covers closing expenses?
According to the terms of the purchase agreement negotiated between the buyer and seller, closing expenses are paid. Most closing expenses are typically covered by the buyer. The closing disclosure will be provided to the buyer, who is also responsible for paying the fees. However, there are several circumstances in which the seller may also be required to cover some closing costs.

How do I estimate closing costs?
Several factors influence your closing costs, and as a result, these costs are not set in stone and will vary from one home purchase to the next.

Factors to include in your closing costs:

The purchase price of the home
Your down payment amount
The type of loan you choose
Any adjustments you negotiate with the seller

How do closing fees impact buying a home?
This is a great question that more people looking to buy a property should ask. You most certainly previously paid a number of fees prior to closing on the property.

You provided earnest money as part of your contract in order to reserve the property. This payment demonstrated to the seller that you were a serious buyer who intended to close on the house. Although it normally goes toward the down payment, earnest money can also be used to cover closing costs.

The lender needs an appraisal in order to secure a mortgage. The cost of an appraisal varies from $300 to 650 based on the size, cost, and travel distance of the home.

Here are the most typical closing-related expenses that must be paid on closing day:
Loan fees
Credit report fees, points, flood determination, homeowners insurance, and private mortgage insurance are all examples of lender fees (if applicable).

Origination points and discount points are the two different kinds of points used in mortgage transactions. Discount points can be paid in advance by homebuyers to lower their interest rate. You may occasionally be able to apply points compensation to closing fees. The fees your lender assesses for the initial effort done to secure your loan are known as origination points.

To determine whether the property is located in a flood plain, lenders could also demand a flood determination. The expense of the determination is covered by the borrower. Your lender will need you to obtain specific flood insurance for the property if the residence is located inside a flood plain.

Before releasing cash for the purchase, your lender will also need confirmation of homeowners insurance. The first year's insurance must be paid in full by closing for the lender. If your mortgage payment is set up to be deducted from your account each month, you can make future payments through escrow.

Charges for document processing costs, loan origination fees, and other fees will also be listed. These costs may cover underwriting, processing loan applications, and other services.

Paying third parties
These are the costs the title company charges to carry out all required background investigations on the property. To verify sure the seller is the true owner of the property and to make sure there are no liens or other problems that would hinder the sale, the title company will conduct a title search. In order to provide a clear title for the acquisition, the title firm issues title insurance as part of this process to guard against previous flaws in the property's title, such as faked documents, unidentified heirs, or unreported liens.

Additionally, your title company will verify the local tax records to be sure the prior owner has paid all taxes due. If not, the seller is responsible for making all payments prior to the home's closing. The title business can prorate the new buyer's taxes thanks to the tax information. The prior owner will receive credit for the taxes paid through the final three months of the year, for instance, if you close in September. You will see a tax bill for the final three months of the year as the new buyer.

Added costs for potential homebuyers
You might wish to engage an attorney to evaluate your contract or represent you during the purchasing process if you decide to acquire the property without the aid of a real estate agent. Normally, legal fees are paid up front and at the time of closure.

You are aware by this point that buying a home is a dynamic process that needs your close attention. The total amount of the closing must depend on a number of factors. Keep track of any fees you pay along the line, and carefully review your closing disclosure statement. You won't have to pay twice this way.

Possible seller credits
In some cases, house inspection reports' recommendations for repairs are not followed through on, or the seller gave the buyer money to finish the work after closing. These goods will appear as a credit from the seller on your closing disclosure statement. Such credits essentially lower the purchase price and cut closing costs. For example, a normal allowance may be for new appliances or flooring.

Is it possible for closing costs to change?
Yes, your closing costs could change at the last minute. For example:

If the home appraises for less than the sales price, the buyer and seller may have to renegotiate the price.
- A title search could turn up a problem, such as a lien on the property.
- If the interest rates jump, you may want to change the type of loan you take out as the buyer. You may also decide to pay more or less for a downpayment.
- Before releasing the final funds, the lender may find a new issue with your credit history. A situation like this could change the closing costs if you need to pay down a credit line with loan funds or if the credit issue affects your interest rate and points.

Can home buyers get help with closing costs?
Many first-time homebuyer programs offer help with closing fees and down payments. Many of these initiatives cater specifically to first-time homebuyers, particularly those with lower and middle-class salaries. Anyone who hasn't owned a property in the previous three years qualifies as a first-time buyer. Therefore, even if you haven't recently purchased a property, you can still be eligible for one of these programs if you've previously owned a home.

As a house buyer, you can also use financial gifts from friends and family to cover closing fees. Inquire with your lender about any restrictions or dollar thresholds for gift letters.