Closing costs: how much will you pay?
When buying a home, your down payment isn’t the only sum you pay at the time of closing. Many first-time home buyers fail to take into account how much they will have to shell out in terms of closing costs. Others may be clueless about how to lower such payments.
Understanding closing costs with a closing cost calculator could be overwhelming for some. This article outlines everything you need to know about closing costs. Some tips, mentioned at the end, on how to reduce what you pay may come in handy.
How much will you pay as closing costs?
Usually, closing costs make up 2-5% of the home’s purchase price. So, if your mortgage is around $300,000, your closing costs could be anywhere between $6,000 and $15,000.
Below is an overview of the states with the highest average closing costs and the states that are on the lower end of the spectrum. The amount mentioned is inclusive of taxes.
States with the highest average closing costs
Washington DC $29,329
Delaware $17,727
New York $13,261
Maryland $11,709
States with the lowest average closing costs
Missouri $1,571
Indiana $2,100
Kentucky $2,229
Iowa $2,272
Closing costs for buyers
Here’s a breakdown of fees that are included in closing cost for buyer:
Appraisal fee: A certified professional appraiser charges around $300-$400 for estimating the property’s worth and matching it with the amount you want to borrow. Appraisers are important because the lender needs to ensure if they can recover the value of the home in case of default on loan.
Home inspection: On an average, home inspection fee ranges from $300-$500. Your lender needs to make sure that the house you are buying is in good shape. If there are any untoward results, you may be in a position to negotiate a lower price or even back out of the contract, should the seller can’t fix the issues.
Application fee: This fee varies based on the lender & the amount of work involved. It basically covers administrative expenses and processing your loan request and can go up to $500.
Loan origination fee: Aka underwriting fee, this is what your lender charges for reviewing and preparing your loan. This fee can be estimated at 0.5-1% of your loan amount.
Credit reporting fee: This covers the cost of getting your credit report and seeing your credit score. It usually comes to $25.
Discount points: You can pay discount points to reduce the interest rate on your loan. One point is 1% of the loan amount. So, if your mortgage is $100,000, a 1-point fee would come to $1,000. But paying points usually makes sense only if you intend to stay in the home for the long-term. Else, the upfront cost isn’t worthwhile.
Attorney’s fee: A real-estate attorney coordinates the closing & finalizes the documentation for your title transfer. In some states, having an attorney at the time of closing is mandatory. Charges may vary from state to state.
Mortgage broker fee: If you take the services of a mortgage broker to get a loan, the agent will charge a commission as a percentage of the loan sum. This may range between 0.5% and 2.75%.
Property taxes: You may have to cough up two months’ worth of property taxes when concluding your home purchase.
Homeowner’s insurance premium: Buying homeowner’s insurance before closing the deal is usually a term of your lender. This insurance protects your house against damage and vandalism. Many lenders will have you pay a year’s worth of homeowner’s insurance at the time of settlement. Expect to pay around $35 monthly for every $100,000 in home value.
Buyers can calculate their closing costs using Houzeo’s closing cost calculator.
Closing costs for sellers
The biggest cost for sellers is the real-estate commission, which is divided between the seller’s agent and the buyer’s agent. Typically, this fee ranges from 5% to 8% of the sale price.
Besides, sellers also need to shell out money for property title, which is a legal document that secures home ownership. Transfer tax is one of them. This transfers the legal rights to a property from the seller to the buyer. Transfer tax varies based on region. For e.g. in New York, this costs $2 for every $500 in home value.
There are instances where sellers make concessions & partake in covering some of the buyers ’closing costs.
Tips to reduce closing costs for buyers
Negotiation skills and some shopping around may come in handy if you want to limit your closing costs. You get to pick the mortgage company of your choice. So, don’t opt for the first one you come in contact. Ask around and settle for the company that offers the lowest fees.
If you’re fortunate enough to be living in a buyer’s market, you may well convince your seller to cover some of your closing costs.
Do not get overwhelmed by the closing costs. They’re inevitable. So, it’s only wise to budget for them in advance.
