Purchasing a home is no simple task, especially when it comes to calculating just how much you’ll be spending to finally get yourself into one. Along with the down payment and figuring out what your first monthly mortgage payments will be, there’s something else to consider: closing costs.
Closing costs can be really tricky to understand. All sorts of factors play into determining how much they’ll be, and they vary based on the buyer’s unique circumstances.
To help you out, I’ve created this useful guide to help you master the process of determining your closing costs so you can figure it all out and (hopefully) save some money.
First, let’s talk about good faith estimates.
When you apply for a loan, it’s up to your lender or mortgage broker to provide a good faith estimate (GFE) of the fees you’ll owe at closing. If they don’t offer you one, ask for it – it’s crucial to you getting the best possible deal!
Because all of your closing costs are spelled out in the GFE, the smartest thing you can do in the beginning of the process is to get at least three of them from different mortgage lenders to compare.
Review each GFE to find the right mix of low interest rates and low fees. You may even be able to negotiate some of the fees your lender will charge, so remember to ask if you can get a better deal.
And keep in mind that GFEs are only estimates, not guarantees. You may see some changes in the final dollar amount.
Who Pays Closing Costs?
When it’s time to close on a new home, both the buyer and the seller will have to pay certain expenses. Buyers usually have more individual costs to pay, but they end up paying less than sellers overall.
Why do the sellers pay more? Because of real estate commission. This commission is based on a percentage of the total sale price. Sellers may also have to pay the balance of the property taxes owed if they haven’t done so already.
And closing costs are not the same nationwide. Because different states have differences in fees and taxes, they’ll have different total closing costs. The three states with the highest average closing costs are:
- Texas ($3,046)
- Alaska ($2,897)
- New York ($2,892)
Which state has the lowest average closing cost, you ask? Nevada, with an average of $2,265.
Think about it this way: both the buyer and the seller are trying to get the best possible deal out of the agreement when determining who pays closing costs.
So, maybe you’re wondering – what is the buyer responsible for?
Calculating Closing Costs as a Buyer
As an eager home buyer, ready to pay all of your closing costs and get your hands on the keys to your new home, you’ll face a range of individual costs.
These include but are not limited to:
- Attorney fee – This is what you owe an attorney to prepare and review all of the documents needed to close your loan.
- Application fee – This is the lender’s cost to process your loan information. This may come up beforehand, when you file the application itself, but some lenders may bundle it with other closing costs.
- Mortgage insurance – If your down payment is less than 20 percent, your bank may make you buy this insurance to protect them if they have to repossess the house and have trouble selling it for the remaining loan balance.
- Escrow deposit – This deposit pays for a couple months’ property taxes and private mortgage insurance. The buyer and seller usually split this fee.
- Title search costs – These are for your lender to protect them from claims against the house. Even if you aren’t using a lender, you’ll have to pay the title company for their services.
- Title insurance – This protects from contractors making claims against your home because they weren’t paid. (Note: these are typically paid by the seller, except in some instances.)
- Recording fees – Local governments require these fees to record the sale. Sometimes, they charge taxes on the sale itself.
- Discount points – This is the money you pay to the lender at closing in order to lower your overall interest rate. Each point you pay for a 30 year loan can drop your interest rate by around .125 of a percentage point.
- Origination points – This is charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan. These are usually expressed as a percentage, where each percent origination fee is equal to 1 percent of the loan amount.
- Appraisal and survey fees – These fees are paid to determine a) the actual value of the property for your bank to use in consider how much of a mortgage they’ll approve, and b) the official boundaries of the property in order to make sure no other nearby properties are encroaching on yours.
The average closing cost is about 2 to 5 percent of the total purchase price of your home. But keep in mind: this isn’t a set number.
If you are calculating closing costs for your home, you can use tools like this one available online to determine a proper estimate of what you might owe.
Negotiating Your Closing Costs
In order to get the best possible deal when calculating your closing costs, it’s of the utmost importance that you comb over each fee listed in your GFE, line by line. Have your lender walk you through each charge, and ask them to explain the details whenever you aren’t sure about something.
Not all costs are set in stone. Some are more flexible than others, like legal fees, insurance costs, and rate lock fees. Any time you can find a cheaper option through shopping around, jump at the opportunity. And watch out for “garbage” fees that can be lowered or eliminated.
You can even ask about the discount another lender might offer to encourage a healthy competition between the two parties eager for your money. If one lender has a better deal, ask if others can match it. Competition in the market creates savings for the consumer!
And remember, if you’d like more information on closing costs, feel free to contact me! I specialize in helping people like you find the right home for the right cost.
Let’s talk – call or send a text to (254) 258-0777.