You have finally saved up enough for a modest down payment on a new home. Congratulations! But wait…your realtor and lender inform you about closing costs. Don’t let this discourage you! Common questions about closing costs are answered below and may help ease the stress and reduce the financial confusion of getting a mortgage.
What are closing costs, and who pays them?
Closing costs are processing fees paid to your lender and are typically paid at — you guessed it — the closing of the real estate transaction. Both buyers and sellers pay closing costs, although the costs for both are different. Closing costs for sellers are typically deducted from the proceeds from the sale. For buyers, this is different; they pay cash for closing fees. Closing costs can include many upfront fees to purchase or refinance a loan. According to Charles Floyd and Marcus T. Allen in their book Real Estate Principles, closing costs differ depending on location and may vary occasionally, but buyers should expect to pay for the following in cash:
• Loan origination fee This is based on a percentage of the loan. The loan origination fee is the process of creating a new loan agreement between the buyer and the lender. This is usually 1%-3% of the loan amount
• Loan discounts, or points These are also based on the percentage of the loan, are an extra charge made by the bank. A point is equal to 1% of the amount of the loan.
• Appraisal fee
• Credit report fee
• Lender’s inspection fee
• Mortgage insurance premium This is typically 2% of the amount of the loan, with 0.5% due at closing and the other 1.5% paid over a 10-year period.
• Attorney or closing agent’s fee
• Hazard insurance premium
• Recording fees for the mortgage the buyer gives (the borrower gives a mortgage in exchange for the loan). (Floyd & Allen, 2014).
Overall, these types of closing costs generally total 2% to 6% of the money you borrow for your home.
How much should I put aside for closing costs?
Closing costs can be more expensive than you think. Rather than scrambling to find the cash they need at closing, smart buyers, with the help of a good real estate agent, must do a little research to decide how much they need for closing expenses. When purchasing a home, budget around 2% – 5 % of the home’s value (Beiber, 2021). For example, if you take out a mortgage for $200,000, then you can expect to pay $2000 – $10,000 in closing costs. According to a 2021 study on closing costs, the average closing costs in the U.S. is around $6,837 (Jenson, 2021) According to the same study, closing costs in Kentucky are among the nation’s lowest, averaging about $2,193 (Jenson, 2021).
Can buyers roll their closing costs into the mortgage loan?
Great! Now you know what comprises closing costs, when and how they are paid, and simple math to calculate how much you may need for closing costs, you may be wondering: Is there a way I can roll closing costs into my mortgage? Unfortunately, if you are purchasing a home, you likely won’t be able to roll the closing costs into your mortgage. This option is typically for those who refinance an existing home loan. One reason, and perhaps the most important reason, is that rolling closing costs into your mortgage would cost you more in the long run because you would pay more interest on closing costs and it will raise your interest rate (Berry, 2020).
But never fear! According to The Mortgage Reports contributor Craig Berry, there are three ways to reduce or lower your closing costs when you don’t have the cash up front to cover them at closing.
• Negotiate seller concessions where the seller pays for some of the closing costs.
• “Buy up the interest rate” so that the lender pays for some or all of the costs (known as “lender credits.”
• In some rare cases, you may be able to finance closing costs when buying with a USDA loan (Berry, 2020).
A quick word about lender credits: “When “buying up” lender credits, lenders will charge a higher interest rate. When you use lender credits, you might pay less up front, but you ultimately pay more over the lifetime of the mortgage. The more credits you receive, the higher your interest rate will be (Rocket HQ, 2022).
Can my realtor help me negotiate closing costs?
While most of your closing costs are negotiated with your lender, your real estate agent can help you get the best deal and help point out unnecessarily high fees, questionable estimates, and help you find the best prices for things like title insurance. Your real estate agent can also help you negotiate with the seller to pay some or all of your closing costs. Finally, your agent can review your closing costs estimates from potential lenders to make sure you get the best price.
Let the agents at Premier Properties help ease the anxiety associated with closing costs. They will be able to answer your questions knowledgably, help you navigate the complexity of closing costs confidently, and negotiate with sellers effectively to help you avoid or reduce paying closing costs.
Premier Properties: Your Property, Our Priority.