Dana Zito Bator from BeMortgage (A Division of Cross Country Mortgage) gives an overview of closing costs

During the home buying process, closing costs are something you’ll hear mentioned frequently. But unlike a quote for a mortgage, it can be difficult to pin down the exact amount you’ll need to save up for these charges. That’s because there are a few different categories that go into closing costs and the final amounts can vary. 

So, what is included in closing costs? They’re made up of a few different things that fall into three main categories:

1. Lender fees are various charges that the bank, or other lenders, will charge you to establish the loan. We’ll dive into these costs in detail, but at a high level, they include things like your appraisal, credit report and origination fees.

2. Title fees are those attributed to the title company who handles the closing, title insurance and legal transaction of recording the property transfer with your local government.

3. Pre-paid costs aren’t fees but rather your money, going into escrow, to pre-pay expenses like taxes and home owner’s insurance.

Lender Fees

As you make a decision about which lender to choose (we recommend at least 2-3 quotes), take a look at the various fees associated with each option. Each lender has different fees that may vary, even though they are for the same items. Typically, you’ll be paying for the appraisal in this category – which is just the report that an independent agent creates to determine the property’s value. If the bank plans to loan you $200,000 for a home, they want to make sure it’s worth at least that because it is their collateral.

Another fee here is the cost of running your credit report. Part of the lender’s verification process is the credit report which will give them an idea what kind of borrower you are. If you haven’t paid a bill on time, your credit report will show it. Getting the report is important, and the bank or lender will pass that charge onto you.

Origination fees are simply the cost of starting and underwriting your loan. There are a few components that make up this fee, including your mortgage lender’s commission, and it’s a fee that can vary more significantly between lenders.

Title Fees

Whether you or your real estate agent chooses the title company, you will get to know them well during the home buying process. This team handles your closing, which is the actual transfer of the property and all the legal paperwork associated with it. But they’ll actually be at work much earlier, reviewing the property details and ensuring you have the ability to get a clear title. The process they go through looks at any potential liens on the property as well as other situations that may have occurred prior to your involvement with the home. Once the title search is complete, this company will also offer you title insurance which will protect you for anything that may come up later – but didn’t show up in the original investigation. An example might be a long-lost relative showing up and claiming an interest in what is now your home.

Another step your title company handles is the legal process of recording you as the new property owner with your local County.  All of these tasks fall under title fees and will be paid at closing to your title company.

Pre-Paid Costs

Pre-paid costs aren’t fees, they’re just your money that will be held in escrow. They’ll cover things like property taxes and homeowner’s insurance and a portion is paid at closing. These costs can add up to thousands a year so most homeowner’s use the escrow system. All this means is that instead of paying $1,000s at one time (when taxes and insurance come due), you’ll add $200 a month to your mortgage and pay it over the course of the year.

Now that we’ve talked through the types of fees you’ll need to account for, you may be asking yourself, “How much are closing costs anyways?” The answer is, it depends.

There are different factors – beyond which lender you choose – that can play a role in how much you pay for closing costs. One big factor is whether or not you receive any closing cost credits. A closing cost credit is a reduction of a specific fee or a rebate at closing.

Closing cost credits

So where exactly does a closing cost credit come from? It can actually come from a couple of places. A lender may offer a reduction in fees, like the origination fee we discussed earlier. Or, a seller may be willing to put some additional money in as a credit.

Here’s an example: Let’s say the seller has had their home on the market for a couple of months and they’re ready to close as soon as possible. Since you’re the first viable offer they’ve received, they may be willing to work with you to ensure you’re happy! Their contribution of $500 towards your closing costs may be well worth your agreement to sign a contract.

Any closing cost credits need to be negotiated prior to signing a contract. It wouldn’t make sense to enter a legal agreement with the seller only to ask at the last minute if they’ll throw in some cash to make your life easier. You’ve agreed to pay at that point whether or not they offer any assistance. The same is true for your lender. Instead, work with your real estate agent as you make your offer on the home and as you choose your lender. They’ll be able to request considerations on your behalf during the negotiation phase.

How much can I expect to spend on closing costs?

So, what should you plan on spending on closing costs? The answer isn’t as concrete as you would hope. On average, you can estimate about 3% of the total purchase price. Meaning, on average, a $250,000 home would equate to $7,500 in closing costs. The challenge is that pinning these numbers down can be difficult and they vary widely by geographic location. The costs and requirements to purchase a home are not only different state to state, but they can also change based on city or town.

Utilize your agent and lender

The best way to determine your closing costs is to work with your local team of professionals. When you start working with a real estate agent, ask them to help you understand what percentage is normal for your area. In addition, remember to check out multiple lenders and see what incentives they might offer you to work with them!

Once you have a home and lender in mind, ask your realtor to get a quote from one or two title companies they recommend. Not only will it give a good idea of the total amount you need to have saved towards closing costs, it will also help you compare title company costs before you sign up with any one agency.

Once you have an idea of your total closing costs and any credits you may be receiving, you may wonder how you pay for them. Outside of some very specific fees you have to pay upfront, such as an appraisal, the rest of your closing costs happen at closing. Another way to describe closing is the time in which you and the seller sign paperwork, and the actual money changes hands.

Can you roll closing costs into your mortgage?

In most cases, you’ll need to be prepared to have the money on hand for closing costs. If that isn’t an option, there may be other alternatives. For example, some lenders may allow you to roll some, if not all, closing costs into the amount you’ll be financing. You could potentially increase the purchase price as well and use the extra amount as a credit towards closing costs. Here’s how that would work. Let’s say you are buying a house for $150,000 and you need an additional $5,000 to cover your closing costs. Your agent negotiates with the seller and you agree to purchase the home for $155,000, with the extra $5,000 acting as a credit at closing.

In order to request the option above, keep in mind that the lender will need verification the home is actually worth $155,000. Lenders don’t like to give more money than they have an asset, or collateral, for. If the appraisal in this scenario came in with a value of $160,000, this may be a good option. If it came in at $150,000 however, this option may be off the table because the lender won’t allow you to finance more than the home is technically worth.

Are closing costs upfront or recurring?

Most of your closing costs are one-time, upfront costs. The exception is your pre-paid costs such as homeowner’s insurance and property taxes. These costs will be ongoing as long as you own the home, even after you pay off your mortgage. Property taxes are paid to the government for owning a piece of property and insurance protects the value of your home, should you experience some sort of loss. After you close, these costs aren’t considered part of the closing but they are ongoing, usually as a part of your monthly mortgage payment. This portion of the payment goes into an escrow account managed by your lender, who will pay the insurance and tax bill as they come due annually.

Can I avoid closing costs?

So, is there a way to avoid closing costs? Not really. Although closing costs are expensive, keep in mind that many of the costs protect you as a new homeowner. The appraisal and inspection will help you understand the property value and condition. And the title company will help to determine any liabilities you may inherit with the purchase, as well as record the transaction to ensure you become the owner legally.

Even if you were buying the home with cash, and didn’t need a lender, some closing costs would apply. Your best step when it comes to these costs is to get educated early and learn about each charge, as well the average costs based on your location. Work with your team of real estate professionals, like your agent and mortgage broker, to evaluate quotes and negotiate on your behalf.

And finally, start saving early! Closing costs can be one of the biggest hurdles when it comes to buying your first property so if you want to get into a home, start taking steps today. Visit our savings program here, and stick around to learn more about these and other costs you should consider. We’ve developed a proven method to help you get into that first home sooner than you might think!

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