The 411 on Closing Costs

Don’t get blindsided—the price tag on that home you’re looking at is not the total amount you will pay for it. That’s because of closing costs. The term is vague because it is an umbrella that covers a variety of fees assessed when a person takes out a mortgage. Learning what different closing costs are, how much you should save, and how to keep those costs low can help prevent unpleasant surprises in your home-buying experience.

The Breakdown

Closing costs are fees, on top of the loan amount, incurred when completing a real estate transaction. Closing costs often include fees for origination, appraisal, home inspection, title, title insurance, homeowner’s insurance, property transfer taxes, etc. Origination fees are charged by the bank for the creation of the loan and typically account for the largest portion of your closing costs. Lenders are required by law to provide a good faith estimate (a Loan Estimate) of potential closing costs within three days of receiving your loan application. As with all estimates, this will not tell you the exact amount you will pay at closing, but it will give you a good idea of what you can expect. The lender should provide you with a closing disclosure statement three days before closing. This document will tell you your actual closing costs, and it should not stray too far from the Loan Estimate.

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How Much Should You Save?

Closing costs are usually between 2–4 percent of the home’s value, 3 percent on average. Those percentages may seem small, but when you consider the fact that you’ll have to pay that amount and a down payment, the costs are higher. A $300,000 mortgage will come with an average of $9,000 in closing costs. Average closing costs may be 3 percent of the home value, but they vary from state to state. Utah, Idaho, and Wyoming have some of the lowest closing costs, while Hawaii, Connecticut, and New Jersey have the highest. Several organizations track average closing costs by state. Your state average is a good starting point for how much you should save, although other factors influence the costs.

Keeping Costs Low

You have several options to decrease, or even eliminate some or all closing costs:

• Homebuyer assistance programs: Not only do first-time homebuyers’ assistance programs help with down payments but they also sometimes give or lend the amount required for closing costs. The availability of these assistance programs depends on the state, or even the county, where you’re purchasing a home.
• Seller credit: Sometimes a seller will agree to cover some or all closing costs for the buyer. Before negotiating an offer that includes a closing cost credit, make sure what your lender allows. A seller credit often results in a higher closing price, leading you to borrow more money to purchase the home.
• Loan inclusion: Some lenders will include your closing costs in the loan amount. Since you’re borrowing this amount, interest will cause you to pay more for your closing costs in the long run.
• No-closing-cost loan: A no-closing-cost, or no-fee, the loan requires no upfront closing costs from the buyer. However, these loans often have higher interest rates, which could cost you more in the long term.

Be prepared—check your state’s average closing costs, save up what you think you will need, and try one or several strategies to reduce your costs. You can rest assured that the next time you buy a home you won’t be blindsided by closing costs.  

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Sources: www.investopedia.com www.bankrate.com www.thebalance.com