After finding your ideal home and securing a mortgage, the final step before getting the keys is paying the closing costs. These costs are not part of your down payment; they are a separate set of fees for the services required to finalize the real estate sale. Understanding these expenses is essential for a smooth and predictable home-buying process.
What’s Included in Mortgage Closing Costs?
Closing costs bundle various fees from your lender and other professionals involved in the transaction. These charges are detailed on your Loan Estimate when you apply for a loan and finalized on the Closing Disclosure you receive three business days before closing. They generally fall into three categories.
- Lender Fees: These are charges from your mortgage provider for creating and processing your loan. Common lender fees include the loan origination fee, application fees, and discount points, which are optional payments made to lower your interest rate.
- Third-Party Fees: Your lender hires third-party professionals for several key services. These fees pay for a home appraisal to confirm the property’s value, a title search and title insurance to ensure the seller has the legal right to sell, a credit report, and sometimes a property survey or flood certification.
- Prepaid Costs and Escrow: Some costs must be paid upfront. You will typically prepay the first year’s homeowners insurance premium and several months of property taxes. This money is held in an escrow account, which your lender uses to manage these recurring bills for you.
How Much Should You Budget for Closing Costs?
As a general rule, you should expect closing costs to be between 2% and 5% of your home’s purchase price. According to the Consumer Financial Protection Bureau (CFPB), these costs can vary significantly based on your location, loan type, and lender.
For a home purchased at $350,000, your closing costs could range from $7,000 to $17,500. This variability makes it crucial to compare offers from multiple lenders.
Who Pays for Closing Costs?
While the buyer typically pays most of the closing costs, this can be a point of negotiation. In some market conditions, a buyer can ask the seller to pay for a portion of these fees. This arrangement is known as seller concessions and must be agreed upon in the purchase contract.
Proven Strategies to Lower Your Closing Costs
You can’t eliminate closing costs, but you can take steps to reduce them:
- Compare Lenders: Obtain Loan Estimates from at least three different lenders to compare fees and rates. This is the most effective way to save.
- Negotiate with the Seller: Ask your real estate agent about negotiating seller concessions to cover some of your costs.
- Close at the End of the Month: You must prepay interest for the days remaining in the month of closing. Closing on the 29th means you only pay a few days of interest, whereas closing on the 3rd requires you to pay for nearly the entire month.
- Review Your Closing Disclosure: Carefully compare your final Closing Disclosure with your initial Loan Estimate. Question any new fees or significant increases to ensure there are no errors.
- Seek Assistance Programs: Look for state or local programs that offer closing cost assistance, especially for first-time homebuyers.
Some lenders may offer a “no-closing-cost” mortgage, but these usually involve a higher interest rate or rolling the fees into the loan balance. While this reduces upfront cash needs, it often results in a higher total loan cost over time.
External Resources:
- For a detailed, step-by-step guide on the home loan process, the Consumer Financial Protection Bureau (CFPB) provides Your Home Loan Toolkit, which includes worksheets and checklists to help you navigate closing.