A Quick Guide to Closing Costs

by Carter Toni

If you are going through the home-buying process for the first time, understanding closing costs can be tough. It’s a major expense that can surprise first-time homebuyers or those refinancing their home. Closing costs are expenditures you pay to your lender in exchange for loan services. After saving for a down payment, house hunting, and applying for a mortgage, you do not want closing costs to devastate you. Exploring what closing costs cover, using a closing cost calculator to make an estimate, and saving up for the money will make the final stretch of the home-buying process easier. If you are a first-time buyer, you might underestimate just how much you will need to pay in closing costs. Also, you probably will be unaware of how you can lower the closing costs. Let’s delve into the details of closing costs.

What Are Closing Costs?

Fees and expenses paid by both the buyer and the seller when a deal is completed are called closing costs. Closing costs can range from 2% to 5% of the price of the home. For instance, closing costs may vary between $3,000 and $9,000, if you buy a house for $150,000. However, closing costs vary across the country—state to state and county to county. As claimed by real estate data firm ClosingCorp, the average closing costs for buying a single-family home added up to $6,837 in the first half of 2021. The closing cost calculator helps in calculating the fees that typically include a wide range of services related to applying for a loan. Some of these costs are related to the property, while others may pertain to the paperwork involved in your mortgage application.

Types of Closing Costs

  • Property-related expenses:
  • Home appraisal fee: Paid to the appraiser for determining the property’s worth
  • Pest inspection fees: Cost for inspection for termites or pest-related damage
  • Property title search fee: To search property records for the discrepancy
  • Property title insurance fee: To protect the borrower against issues in ownership after the sale
  • Mortgage-related fees:
  • Application fee: Charged by the lender to process the mortgage application
  • Attorney fee: Paid to a real estate attorney to prepare purchase contract and agreement
  • Credit report fee: Charged by the lender to check your credit report and score
  • Escrow deposit: Usually 2 months’ deposit reserved for property taxes, premiums, and insurance
  • Flood Inspection fee: Location-specific fee when your lender requires a certified flood inspector to establish if the home is in a flood zone
  • Origination fee: Includes the lender’s administrative costs, which can be calculated on the closing cost calculator for buyer—typically 1% of the loan amount
  • Underwriting fee: Cost for evaluation and approval of your application
  • Courier fees: Paid for transportation of paper documents
  • Mortgage insurance fees: Mortgage insurance premium built into the monthly payment, if the down payment is less than 20%
  • Points: Optional payment to the lender in exchange for a lower interest rate on your loan and thereby lower monthly payment
  • Homeowner’s association transfer fees: HOA transfer fee to cover for costs involved in the transfer of ownership
  • Closing fee: Paid to the party handling the closing
  • Property tax: Pro-rated property taxes

Who Pays for Closing Costs?

Most closing costs are paid by the buyer. But some closing costs, such as the real estate agent’s commission, are paid by the seller. Homebuyers in the United States pay, on average, $5,749 for closing costs (including taxes), according to a 2019 survey from ClosingCorp. As the buyer, you might try to negotiate some of your costs into the seller’s corner, such as flood and hazard insurance premiums,  homeowners’ insurance and property tax escrow deposits, and per-diem interest. A seller is required to pay commissions owed to real estate agents and other fees related to transferring title to the property, as compared to a buyer who is typically required to pay loan-related costs.

How to Reduce the Closing Costs?

Closing costs can be limited by following a few tips.

  1. Sometimes sellers can agree to contribute to the closing costs, if the property may have been on the market for a long time. By just adding the sales price, mortgage information, and closing date in the seller closing cost calculator, the total can be estimated.
  2. You can opt for a no-closing-cost loan, which is nothing other than the closing cost added to the principal. You can pay back this loan with interest along with the mortgage.
  3. Select the right lender by comparing the fees of different lenders. Some lenders might not charge you the application fee.
  4. The loan origination fee is not charged by all lenders. You can always find one who will waive off or not charge at all.
  5. You can consider signing the loan papers toward the end of the month to reduce the prepaid daily interest charges.

Closing Cost Calculator

This is a tool that will help you understand and get an estimate of your total closing costs and the amount needed at settlement in a real estate transaction. All real estate companies, like FSBO, Fizber, and Houzeo, have closing cost calculators on their websites to calculate the total closing expenses for buying a home. You can use the calculator even before you begin looking for a home or when you are deciding on a mortgage lender. The closing cost calculator for buyers allows you to get an estimate of costs without waiting to apply for a mortgage. Not just buyers, but sellers who are highly interested to make a deal or whose property has been on the market for a long time sometimes agree to contribute money toward the closing costs. The seller closing cost calculator makes it easy to estimate the closing costs incurred on selling the home and its associated net proceeds.

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