How Much Are Closing Costs?
Closing costs are the fees and expenses associated with buying or refinancing a home. We will discuss what these costs are, how much they can add up to, how to keep them as low as possible, and provide tips on budgeting for them when planning a home purchase or refinance so buyers can save money during their transaction.
How is the Closing Cost Estimated?
When it comes to estimating closing costs, there are a few factors to consider. These costs can vary significantly depending on the type of loan, location, and other factors. Common closing costs include mortgage points, loan origination fees, appraisal fees, document preparation fees, title search fees, credit report fees, and government charges such as transfer taxes and recording fees. Buyers should expect to pay for all of the expenses related to the loan. Home inspections and surveys may also be required in some areas.
Additionally, buyers should be aware of government charges that include transfer taxes, recording fees, and other local or state taxes that may apply. The total closing costs will vary depending on the amount of the loan, where it’s located, and what type of loan is being obtained.
Generally speaking, closing costs can add up to 2 percent to 5 percent of the purchase price. So for a $200,000 property, the closing costs could be anywhere from $4,000 to $10,000. It’s always a good idea for buyers to research closing costs and create a budget for them before entering into any type of home purchase or refinance agreement. Knowing what to expect will help buyers prepare financially and avoid any surprises.
How Can You Keep Closing Costs as Low as Possible?
Closing costs can add up significantly, so it's important for buyers to be aware of ways they can keep them as low as possible. One way is to compare rates and fees from different lenders to get the best deal. Some lenders may offer discounts on closing costs for first-time buyers or those with good credit scores. Buyers should also ask their lenders about any special programs or promotional offers that could reduce their closing costs. In most cases, buyers can also negotiate closing costs with the seller or lender in order to get a better deal on the total cost of their purchase or refinance. Some lenders may even offer discounts on closing costs for first-time buyers or those with good credit scores.
Buyers can avoid overpaying during the purchase or refinance process by doing their research ahead of time and preparing a budget for closing costs. With the right preparation and knowledge, buyers can save money and enjoy the home of their dreams without overpaying during the purchasing or refinancing process.
It may also be beneficial for buyers to look into government programs like VA loans, FHA loans, and USDA loans which often provide very low rates and reduced closing costs compared with traditional loans from conventional lenders. These programs generally have stringent guidelines, including income requirements but could help some borrowers save money by reducing the cost associated with buying a home.
What About a "No-Closing-Cost" Mortgage?
Despite the name, a no-closing-cost mortgage doesn't mean you get away without paying any closing costs. Instead, your lender either rolls the closing costs into your monthly mortgage payment or charges you a higher interest rate for the life of the loan. Either way, you pay less at the closing table, but the true cost of your home substantially increases. Therefore, it doesn't usually make financial sense to go with a no-closing-cost mortgage.
Still, a no-closing-cost mortgage can be advantageous for first-time homebuyers who may have trouble coming up with a down payment, let alone closing costs. It can also be a good option if you expect to move or refinance in a year or two before those higher monthly payments or interest rates add up.
Can You Have the Seller Cover Closing Costs?
In most circumstances, it is possible to have the seller cover some of the closing costs, although this will depend on various factors, such as the type of loan being used and the terms of the contract. Buyers should always consult with their lender or real estate agent to determine if it is an option in their particular situation.
It is important to note that having a seller contribute to closing costs does not necessarily mean that the buyer does not have to pay for anything at closing; rather, it can reduce some of the expenses associated with a home purchase or refinance. For instance, a seller may agree to pay for part or all of the closing costs related to title search fees, document preparation fees, appraisal fees, and transfer taxes. In some cases, buyers can negotiate with the seller in order to get them to pay for all or part of certain items, such as points and origination fees.
When negotiating with a seller regarding who should cover closing costs, buyers should be aware that if they ask for more assistance than what is customary in their area, they may be less likely to get an offer accepted by a seller. Additionally, while having a seller cover closing costs can reduce out-of-pocket expenses at closing time, buyers should also consider whether they would benefit more from making smaller payments over time due to a lower interest rate on their loan.
Furthermore, when asking a seller to cover closing costs, it’s important for buyers to understand whether these are non-recurring expenses or recurring expenses. Non-recurring expenses, which include origination fees and points, are one-time charges. In contrast, recurring expenses, such as taxes and insurance, will need to be paid year after year by the borrower. Understanding this difference can help buyers make sure they are getting the best deal possible when negotiating who pays for what at closing time.
Ultimately, when deciding whether it is feasible or beneficial for you to have a seller contribute to your home purchase or refinance closing costs, there are several factors that need careful consideration before proceeding. It’s important for buyers to do their homework ahead of time in order to ensure that any agreement negotiated between them and the seller is mutually beneficial and results in savings both now and down the road into future payments on their mortgage loan.
Can Higher Closing Costs be a Good Thing?
Higher closing costs can be good if they ultimately save you money over the long run. This happens with mortgage discount points, which increase your upfront closing costs while buying down your interest rate. One point equals 1% of the loan amount, with each point typically shaving one-quarter of a percent off the interest rate. For example, on a $400,000 loan, you would save about $22,000 per point over the life of the loan, assuming an initial 5% interest rate.
Points generally make sense if you plan on staying in the home long enough to recoup the higher upfront costs. You can use an online mortgage points calculator to crunch the numbers and help you decide.
Conclusion
It is important for buyers to research closing costs before entering into a home purchase or refinance agreement. Knowing what to expect will help them prepare financially and avoid any surprises. Additionally, by negotiating with the seller or lender, shopping around for the best deal, and looking into options like discounts or lower fees, buyers can reduce their closing costs and save money.
We hope this article has given you a better understanding of closing costs and how to keep them as low as possible. Happy house-hunting!