What Are Closing Costs and How Much Are They?
During the long process of house hunting, mortgage closing costs are sometimes an overlooked factor until it’s time to pay. Understanding and preparing for closing costs in advance will prevent sticker shock at the end of your home buying journey. Ideally, these fees will be factored into your overall down payment and mortgage budgeting.
What Are Closing Costs?
Closing costs, also referred to as settlement costs, are various fees that are paid at the time you close on your home. They generally come from local taxes and fees from services provided to you during the home buying process.
Typical closing costs run between 2% and 5% of the total mortgage loan cost. The percentage may seem deceivingly small; however a substantial mortgage loan could lead to a hefty total at the closing table. The range in percentage can also produce a surprisingly large variance in what you could be expected to pay.
Based on the average closing cost range, anywhere from $6,000 to $15,000 in total closing costs is possible on a $300,000 loan. This significant range makes it important to know what you will be accountable for paying at closing, and having a payment plan determined in advance.
Who Pays the Closing Costs?
The buyer is typically responsible for paying the majority of the closing costs of a sale. Grant funds, a monetary gift from family, and lender credits can be utilized to assist with covering closing costs. The seller will typically have to pay a few costs from real estate agent commissions, taxes, and possibly legal fees. The seller might also agree to absorb all of the closing costs for the buyer as part of the negotiated sales price.
Types of Real Estate Closing Costs
The exact closing costs you are responsible for will depend on your locality, loan type, lender, and other circumstances. However, there are some general fees that are frequently included in closing costs. These do not include miscellaneous fees that are dependent on municipality or particular loan type.
Mortgage Origination Fees
Also called loan origination fees, these are collected by the bank or lender which created the buyer’s mortgage loan. Lenders will generally have a fixed origination fee, but it can range up to one percent of the mortgage loan.
Real Estate Agent Fees
The closing cost most likely to fall on the seller are real estate agent fees. If the property was listed by a real estate agent, they will collect a commission when the sale is made. Fees for agents typically run between two and six percent of the sale price.
A professional appraiser assesses the home’s value and ensures the buyer is paying a fair market value for the property. This is sometimes required by the lender and the cost generally falls on the buyer. The cost of an appraisal can vary widely depending on the home location, square footage, and features unique to the home.
Private Mortgage Insurance (PMI)
If the buyer’s down payment is less than 20% the lender will often require the buyer to purchase PMI. FHA loans require both an upfront mortgage insurance premium and an annual mortgage premium, which is collected as a monthly payment. Conventional mortgage loans have a variety of insurance options; and premiums vary based on the credit score, amount of down payment, and debt-to-income ratio of the buyer.
If you are required to take out PMI, there may be initial payments due at closing. VA loans do not require the purchase of PMI, even with no down payment, but do include a funding fee unless the buyer meets certain qualifications for exemption.
Discount points can be purchased by the buyer to reduce the interest rate on their mortgage loan. Essentially, discount points are prepaid interest. This payment will typically be due to the lender at closing.
Title Fees and Insurance
Title fees include charges associated with issuing the title of ownership to the buyer. They include the title search fee and notary fees. Whether these fees are paid by the buyer or seller varies from state to state.
Title insurance is purchased to protect both the buyer and the lender in the event that ownership of the home is challenged. This could occur due to errors or violations made by previous owners of the home.
Owner’s title insurance provides protection to the new homeowner, and is typically a one-time expense at the time the home is purchased. Whether required by your lender or not, owner’s insurance is recommended to protect your investment. Lender’s title insurance, which is generally required by the lender in order to obtain the mortgage loan, protects the lender against title issues that could affect their loan. This is paid when a home is purchased or refinanced.
Local state and county governments collect taxes for recording the sale and transfer of the property. These costs vary widely from state to state and could be paid by the buyer or the seller, or split between the two parties.
Lenders may require the buyer to pay a portion of their local property taxes and homeowners insurance in advance at closing. These fees are bundled under what are considered “prepaid costs” and are included in an estimate of closing costs by the lender.
How to Estimate Your Closing Costs Accurately
Closing costs do not need to be an unpredictable factor in the homebuying process. A qualified mortgage lender can help you accurately estimate your closing costs and assess your payment options. If you are ready to begin house hunting, your first step should be getting loan pre approval.
Getting pre approved with Verified by Vellum provides you with a full understanding of your purchasing power and streamlines the rest of your home buying process. Contact us today and take your first steps towards homeownership with confidence.