Buying a house has been the most exciting financial milestone of my life — but also the most nerve-wracking.
The biggest source of stress for my wife and me was finally getting enough money together for our target down payment after six months of saving all my income from freelance writing. We thought we were set until we remembered we also had to pay closing costs for our mortgage.
How much are closing costs? Typically, 2 to 5 percent of the purchase price of the home, according to SmartAsset. But we were able to get ours down to around 0.4 percent.
Read on to learn what kinds of closing costs to expect and how to lower them so you can save money on your home purchase.
How much are closing costs for buyers?
Based on SmartAsset’s range, closing costs for a $200,000 home might cost you anywhere between $4,000 and $10,000, on average.
After you complete your loan application, the lender will provide you with what’s called a loan estimate, which includes what your closing costs might be. As the name of the document suggests, it provides only estimates, but those estimates will give you an idea of what to expect.
Here are some costs you might find on your loan estimate.
Application fee: This fee covers the cost of the loan underwriting process. Not all lenders charge this fee, and some might be willing to negotiate.
Appraisal fee: This fee is paid directly to the appraisal company that determines the fair market value of the home you’re purchasing.
Attorney fee: In states that require it, this fee covers the cost of having an attorney review the final documents prepared by the lender or seller on your behalf or the lender’s behalf.
Courier fee: When applicable, this fee covers the cost of transporting the documents to make sure you close on time.
Credit report fee: Your credit history is a major factor in the underwriting process. This fee covers the cost of pulling your three credit reports to see if anything is amiss.
Discount points: With a lump-sum payment at closing, you can lower your interest rate for the life of the loan by purchasing discount points. Each point costs 1 percent of the loan amount. Essentially, these discount points are prepaid interest.
Document preparation fee: Either the lender or the title company might charge this fee to cover the time spent preparing your loan documents.
Escrow fee: This fee is paid to the title company, escrow company, or attorney who is responsible for conducting the closing of your loan. It also might include other services like recording your title information.
Escrow deposit: When you close on your house, you typically need to put a couple of months’ worth of property tax and mortgage insurance into your escrow account. Future mortgage payments will include escrow payments to keep them paid in full.
FHA Upfront Mortgage Insurance Premium (UFMIP): If you’re getting a Federal Housing Administration (FHA) loan, you’re required to pay a UFMIP upon closing. The cost is 1.75 percent of the base loan amount.
Flood determination fee: If the area you live in has flood zones, this fee is paid to a third party that will determine if your house is located in one. If so, you’ll need to purchase flood insurance as well.
Home inspection fee: This fee goes to the third-party inspection company that verifies the condition of the property and determines what kind of repairs might be necessary. Inspections for pests and lead-based paint might be performed separately.
Homeowners association (HOA) dues: If you’re buying a house in an HOA, the association might require that you pay a couple of months’ worth of dues and an investment fee to join.
Homeowners insurance: Typically paid annually and due at closing, your homeowners insurance policy covers you if your house sustains certain damages.
Origination fee: In addition to the application, the lender has other costs associated with setting up your loan, including administration and processing fees.
Prepaid interest: Since you usually don’t have to make your first mortgage payment until a month after you close, some lenders require that you prepay the interest that accrues in the meantime.
Recording fee: This fee goes to the city or county office that is responsible for recording public land records for the sale.
Survey fee: Where required, this fee goes to a third-party surveying company to verify property lines.
Title insurance: There are two types of title insurance: lender’s and buyer’s. The former is mandatory and protects the lender if there’s a problem with the title. The latter is optional and protects you if someone challenges your right to own the home.
Title search fee: This fee goes to the title company for doing a thorough search of the property records and deed to make sure no one else has a legal claim on the home.
Transfer taxes: These taxes are paid when the seller transfers the title to the borrower.
VA funding fee: If you have a VA loan, this fee is due upon closing and ranges from 1.25 to 3.3 percent of the loan amount.
3 ways you can potentially lower your closing costs
There’s not a lot of room for negotiating each line item in your closing costs. But with some lenders, there are ways to limit how much you owe at closing.
1. Look for promotions
Promotions typically happen only with new-construction homes as a way to incentivize buyers to buy now and use their builders’ preferred lenders.
For example, the builder of our new-construction home offered to pay $3,000 of our closing costs if we went with one of its preferred lenders for our mortgage loan. Fortunately, that lender also happened to have the most competitive interest rate, so we took the deal.
2. Negotiate with the seller
If the seller is desperate to get rid of the house — maybe they’ve already bought a new home and don’t want two mortgage payments — they might be willing to help cover some of the costs.
Another way to negotiate is to offer a higher sale price in return for the seller paying the closing costs. Even though you’re technically still paying more, you’re effectively rolling the closing costs into your loan rather than paying for them in cash at closing.
3. Take a higher interest rate
Lenders often are willing to give you credits to cover your closing costs in return for a slightly higher interest rate on your loan. Before you agree to this arrangement, calculate how much that higher interest rate would cost you for the time you’ll be staying in the home.
It can be worth doing if you’re planning to move or refinance after a few years. But the longer you stick with the mortgage, the more likely it is that the higher interest rate will end up being more expensive.
Do your due diligence
Unfortunately, there isn’t an exact answer when it comes to figuring out how much closing costs are. Several factors go into that calculation. However, it’s crucial that homebuyers know what they’re paying for and why.
It’s also important to know if there are ways to decrease how much you owe for closing costs. Getting a deal on our closing costs meant my wife and I could put down as much as we wanted without completely liquidating our savings account. It was worth the time we spent finding a builder with a promotion.
Each loan is different, so make sure to discuss the terms with the seller and lender to see what your options are.
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