What Are Closing Costs?
The last stage of buying a house is called “closing,” and it is the happy moment when a purchaser actually takes possession of their new home. Before they get the keys, however, there are many papers to sign and fees and expenses to pay. The money paid out during the closing process is known as the closing costs.
There are two main categories of closing costs:
- Fees paid to people and entities who assisted in the home buying process — appraisers, inspectors, lenders, title companies, etc.
- Money that is put into escrow by the lender to pay for future annual expenses such as insurance and property taxes.
What is Included in Closing Costs?
The payments associated with closing may include, but are not limited to:
- The lender's origination costs — the money paid to the lender for their services in originating and approving the mortgage loan
- Discount points — optional, up-front payment to the lender to reduce the interest payment on the loan and thereby reduce the monthly payments
- Document review fee/processing fee —covers the cost of processing documentation related to a mortgage application; a separate credit report fee is sometimes also charged
- Underwriting fee — lender’s fee for researching and verifying a borrower’s financial information
- Closing agent fees — also known as an “escrow fee,” it pays the party who handles the closing, such as an attorney or title company
- Attorney’s fees — some states require attorneys to be involved during the process; this is optional in other states
- Title insurance — lender’s title insurance protects the lender if there is an ownership issue or lien against the property that was undiscovered during the title search; optional owner’s title insurance provides similar protection for the new owner
- Recording fees — paid to the local recording office, city or county, for filing public land records
- Appraisal — paid to a professional property appraiser for assessing the home’s fair market value
- Transfer taxes — covers transferring the title from the seller to the buyer
- Property taxes — money may be put into escrow equal to two month’s property taxes; this money will be added to from each monthly loan payment and used to pay the annual tax assessment when it is due
- Mortgage insurance premiums — for a traditional mortgage with less than 20 percent down payment, a lender may require private mortgage insurance and payment of the first month’s premium at closing; for an FHA loan, an upfront mortgage insurance premium of 1.75% of the loan amount is due at closing
- Homeowner's insurance premiums — money put into escrow to pay for some portion of the first year’s insurance premium
- Flood insurance, if required — put into escrow, just as with homeowner’s insurance; there may also be a fee for a certified flood inspector to determine if the property is in a flood zone
- Required services — fees for any other services involved in the home buying process, such as courier services, HOA transfers, lead-based paint inspections, pest inspections, surveys, etc.
How Much Are My Closing Costs Going to Be?
There is no single answer to the question of how much closing costs will be, but they typically range between 2 percent and 5 percent of the property value. For example, on a home with a purchase price of $300,000, total closing costs are likely to be between $6,000 and $15,000.
If you want an estimate of your own closing costs, our closing cost calculator can help guide you. It takes into consideration origination fees, taxes and insurance, and other service fees. If you need additional information, contact a Bethpage mortgage expert. The law also requires that buyers receive a detailed outline of the closing costs at least three days before closing.
How Do I Reduce My Closing Costs?
Buyers already faced with down payments, moving expenses, and perhaps repair bills, may want to minimize their closing costs. There are some ways to limit costs, although not all of them will be effective all the time.
- Comparison shop for services. Lenders will suggest title services, an appraiser, a pest inspector, etc. but buyers are free to look around on their own and compare prices to save money.
- Ask for help from a motivated seller. If a home has been on the market for a long time without offers, or a seller needs to move quickly, or even if the seller just wants to get this deal completed, they can often be persuaded to help cover some of the buyer’s closing costs. It’s worth asking.
- Close at the end of the month. This results in savings on prepaid daily interest.
- Ask questions. Mistakes can happen. Buyers should make sure they understand the purpose of each fee and go over them carefully to make sure there are no duplications or inconsistencies. If anything isn’t clear, check with the lender.
- Roll closing costs into your mortgage loan. This will save money right now, but cost significantly more in the long run. Thirty years of interest on closing costs definitely add up. Some lenders will also offer to pay closing costs in exchange for a higher interest rate on the home loan.
- Apply for an FHA loan. These government-backed loans allow buyers to get up to 6 percent of the loan amount from family, friends, sellers, mortgage brokers, non-profits or government grants to put toward closing costs.
To learn more about mortgages and your options, or to get started on pre-qualification today, contact our Bethpage mortgage experts.