A Guide to Understanding Closing Costs
If you’re preparing to buy a home, whether it’s your first or fifth home, the little details might surprise you time and time again. One of those “little details” with regards to the financial aspect of buying might be your closing costs. It’s easy to understand why closing costs may appear confusing at first, as they are a unique set of fees involved in a purchase unlike any other you may make in your lifetime.
That being said, a simple overview will help you to better understand why closing costs are part of the process of buying a home. Let’s take a look at what they are and what you can expect at your closing.
What Are Closing Costs?
To start off, closing costs are not hidden fees. In the context of buying a home, “Closing costs” is the blanket term applied to the services, fees, and expenses associated with finalizing a mortgage. Whether you’re buying or refinancing a home, closing costs apply regardless. They include expenses such as homeowner’s insurance, home inspections, title searches, surveys, taxes, deed recording fees, credit report changes, and commission fees. These costs are legally required to be reported within a certain window after submitting the mortgage application, in a sort of “good faith estimate” to give you a good idea of what costs and fees are coming your way if you work with that lender.
Basic Closing Costs
That being said, there are two things to remember when discussing closing costs. One would be the Basic Closing Costs, which include everything listed above as well as general loan processing fees. The costs often don’t vary from lender to lender.
Secondly, you must also remember the Origination Fees. Also known as origination points, these are paid on top of all the other closing costs. Origination fees can vary from lender to lender, depending on current interest rates. Origination fees are also quoted from the total loan amount, generally ranging between 0.5% and 1% and tend to cover (or break down) processing fees like underwriting and funding. Keep in mind that origination fees are set up in advance of taking a loan and should not be a surprise at the time of closing, because they’re meant to offset some of the costs associated with the mortgage process.
Overall, the total fees often range between 2% and 5% of the total loan amount. Different agencies and entities offer different prices for various closing expenses, but that percent range is what you can generally expect.
Responsibility for paying closing costs varies between buyer and seller. The buyer usually pays for fees related to their mortgage loan, but the seller pays the agent’s commission and the fees associated with transferring the property. However, there are areas of the closing costs that can be negotiated, which we’ll be getting into next.
If you’re interested in playing around with a Closing Cost Calculator, NerdWallet programmed one that you can find here.
Negotiating & Reducing Closing Costs
Early in the homebuying process, you should receive a Loan Estimate Form, which is an itemized list of what you’re paying for. After the breakdown of the loan amount, interest rate, and estimated monthly payments, there’s a section frequently known as “shoppable services” that include pest inspection, survey, insurance binders, a settlement agent, etc.
Don’t overlook the lender fees! Any mortgage lender you work with will charge a fee for their services. Comparing offers from various lenders will give you a good idea of what to expect before you submit your application. This information can also come in handy when negotiating—or directly asking for—a discount on their individual fees, which you should try to do, if possible.
Try to have the mindset that it’s “better to ask and get denied, than not ask at all”, throughout the homebuying process, lender fees included.
Understanding Buyer vs Seller Responsibilities
Remember that Loan Estimate Form? On that form you will find an area that shows what the seller is paying for, which will be listed as “seller credits.” In other words, this section shows which items the seller will be financially responsible for, such as realtor commissions or potentially some of the closing costs. Another thing to consider is finding your own vendors. The ones that appear on your Loan Estimate Form are likely the most expensive ones in your area, and if you shop the market, you’ll likely be able to save hundreds, even thousands of dollars in closing costs. Lenders often have a list of more affordable vendors on hand, which you should ask for even if you’re planning on doing your own market research.
Asking For Alternatives
Remember that “better ask and get denied than not ask at all” mindset?
That comes into play here. Say you don’t have the cash on hand to cover the closing costs upfront. Some lenders have alternative options, but they might end up being more costly in the long run, like if they propose adding to your monthly payment or adding interest on your closing costs. Asking for alternative options is typically only best when you’re short on funds at the time of closing.
Financial Help Is Available
Now, you don’t want to get a loan on a loan, so that’s not what we’re suggesting. Instead, look around for grants and government assistance programs that can lift the buying burden, at least a little bit. These programs can vary from state to state, county to county, and even city to city, but they are out there for those willing to put in a little bit of research. This is especially pertinent to first-time homebuyers, for they may have access to even more grants and assistance opportunities.
Homebuying Doesn’t Need to Be a Painful Process
Yes, there’s a lot on the line; it’s a major financial commitment and buying a house is a semi-permanent decision. That doesn’t mean that it has to be a permanent blow to your bank account, cause you sleepless nights, or completely overwhelm you.
The bottom line is: do your research and the closing costs and final figures won’t be so much of a shock. Keep in mind that there are tons of options out there as far as lenders and offers are concerned, so don’t settle and don’t hesitate to shop around to compare costs in your area. Familiarize yourself with the Real Estate Settlement Procedures Act (RESPA) so you know what protections exist for you as the buyer.
EDGEhomes Can Guide You Through the Homebuying Process
Now that you have a better understanding of closing costs, you might be ready to take the next step in the homebuying process. We at EDGEhomes are here to help you along the way. EDGEhomes has sought out to redefine value, thereby becoming a leader among Utah home builders. Whether you’re ready to buy or ready to build, we have quick move-ins and new home communities throughout the Wasatch Front for those seeking a more specialized homebuying experience.