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For many of us, buying a home is the biggest investment we’ll make. When you’re crunching the numbers, be sure to budget for closing costs. They vary between lenders, states, and properties, and they can add up to thousands of dollars.
Closing costs are the fees that come with transferring ownership of a property. Basically, any time someone performs a service, you’ll pay a fee. You’ll pay these banks, lenders or insurers a settlement at the closing of a real estate transaction. This compensates those involved with funding, approving and insuring the sale.
The buyer and seller split the closing costs. The costs vary based on where you live, the property you buy, and the type of loan you take out.
The closing costs aren’t listed in the purchase price, and they’re separate from the down payment. After you submit your mortgage application, your lender gives you a Loan Estimate within three business days that includes a list of expected closing costs and explanations.
If you move forward with the purchase, you’ll get a Closing Disclosure Statement that outlines the final closing costs three business days before closing. There are limits to the amount that fees can increase by, so there should be no surprises.
Closing costs vary based on your lender, state, loan amount and size and type of the property — but let’s look at the nationwide averages. At the moment, closing costs add up to an average of 1.15% of the purchase price before taxes.
This may seem like an insignificant number, but it can translate to thousands of dollars.
These charges are relative to the price of property in your state. For example, Washington DC and New York have the most expensive real estate in the country, and they have higher closing costs to match. In comparison, Iowa and Missouri have the lowest property prices, so buyers and sellers cough up a lot less money in closing costs.
Typically, the buyer pays the bulk of the fees and taxes — but sellers are on the hook, too.
Buyers are saddled with the costs associated with purchasing a property and taking out a home loan, such as inspection fees, origination fees and homeowners insurance.
Sellers are usually responsible for the real estate agent’s commission and the fees relating to the transfer of property, such as the transfer tax.
The question of who pays closing costs also comes down to the type of loan. Each mortgage program has its own set of stipulations.
For example, veterans who buy a home with the help of a VA loan aren’t allowed to pay certain closing costs, like attorney fees and document fees. To secure a sale, sellers often make concessions and cover those closing costs. VA borrows are, however, responsible for paying the VA funding fee.
FHA loans limit a seller’s concession to 3% of the purchase price. This means that sellers can’t contribute any more than that, even if they’re desperate to finalize a transaction. (Note: The FHA used to allow concessions up to 6%, but reduced it to 3% in 2010).
Conventional loans are inconsistent. In some states, lenders will allow sellers to put up to 6% of the sales price towards the buyer’s closing costs. In others, the limit is 3%.
These are the common closing costs, taxes and other fees you can expect to pay when buying or selling property.
Environmental conditions can cause closing costs to climb in some states. For example, in Florida and Wyoming, you’ll be charged a flood certification fee to get the government-required document that determines whether the property is located in a flood plain. If it is, you’ll have to buy flood insurance.
Most fees and taxes are set in stone, but there are a few ways to cut down your closing costs:
Sign your loan later in the month. Unless you’re applying for a reverse mortgage, you’ll need to prepay the cost of interest on your loan from the day you sign your loan papers to the day you make your first mortgage payment. To minimize the amount of prepaid daily interest, delay your closing date until the end of the month. This means you’ll have less time between paying your closing costs ainstallmentonthly instalment, so be sure to budget carefully.
Comparison shop to save. In Section C of your Loan Estimate, you’ll see a list of “Services you can shop for.” These are third-party charges that typically include the surveying fee, title search, title insurance and pest inspection. They also cover the settlement agent, who oversees the closing and legal transfer of title.
Since these individuals work outside the mortgage company, they set their own prices and fees and can vary by as much as 10%. You can save the most with title insurance and settlement services, so do your own research or ask friends or family for referrals.
Comb through the fees, line by line. If anything seems off, contact your lender. For example, if your lender hasn’t been sending you papers via messenger, yet you’re being charged courier fees, you can get those removed.
Pay for your home in cash. If you can pay for your home in cold, hard cash, you may be able to avoid fees that come with being approved for a mortgage, including the appraisal fee, inspection fee, title insurance, mortgage insurance and the intangible tax on mortgage. You may still want to consider buying title insurance so you don’t run into issues from the previous owner. If you can’t pay cash but can put down 20% with a conventional loan, you can at least avoid paying private mortgage insurance (PMI), which protects the lender in case you default, but increases your monthly payment.
Ask for seller concessions. Sometimes, sellers contribute to your closing costs to speed up the sale. There are legal limits to this depending on the type of loan, but it’s usually between 3% and 6% of the sale price. With this strategy, you’re more likely to be successful in a buyer’s market.
Talk to your bank about discounts. To incentivize mortgages, many banks offer discounts and rebates to their existing customers. For example, eligible Bank of America Preferred Rewards members can slash their origination fee by $200 to $600 based on their tier.
Consider a no-closing-costs mortgage. If you’re strapped for cash, you can avoid upfront fees by getting a no-closing-costs mortgage. But one of two things will happen: the lender will charge you a higher interest rate, or they’ll roll those fees into the loan, which will increase your monthly mortgage payments.
According to the IRS, there are two closing costs you can claim on your tax returns:
If you’re buying a home, you’ll need to set aside some funds for the closing costs that lenders require. They’re unavoidable and vary based on where you live and what kind of property you’re purchasing.
To save as much money as possible, shop around and compare lenders with our guide to mortgages.
That being said, purchasing property can be complex, so many buyers outside those states choose to hire an attorney to represent their interests.
Across the rest of the country, transfer taxes typically come to 0.5% to 2% of the sale price.
Katia Iervasi is a staff writer who hails from Australia and now calls New York home. Her writing and analysis has been featured on sites like Forbes, Best Company and Financial Advisor around the world. Armed with a BA in Communication and a journalistic eye for detail, she navigates insurance and finance topics for Finder, so you can splash your cash smartly (and be a pro when the subject pops up at dinner parties).
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