The purchase of a home or a refinance is a fairly complex transaction involving many different agencies and individuals. The process requires a number of moving parts, and buyers and sellers should expect a multitude of additional costs and expenses during the closing process. The final agreed upon price of the home is not the total amount you will end up paying. In the real estate world, there are additional expenses that come with the final price, which are also known as closing costs.
What are closing costs?
The list of additional costs, fees and required expenses that are necessary to close on the purchase of a home or a mortgage refinancing are known as closing costs. Closing costs generally add up to about 2% to 5% of the home’s purchase price. The fees typically fall on the buyer to pay, but in some situations you may be able to negotiate the seller covering part of the costs.
“While you can sometimes negotiate with the seller to cover some or all of a buyer’s closing costs, buyers should still budget as if they will pay for closing costs (about 2% to 5% of the home’s value) when shopping for a home,” Justin Havre, owner of Justin Havre and Associates of RE/MAX First, said.
“I think that sometimes the articles that buyers might come across while doing their research online can make certain seller concessions seem more commonplace than they are. While it’s always a possibility, they need to act as if they won’t receive assistance from the seller to avoid missing out on a home they could have afforded otherwise,” Havre said.
What fees are included in closing costs?
The list of fees included in closing costs can get extensive and is heavily dependent on your mortgage lender, the state you live in and your loan type. While you may be unsure of what all will be included, your lender is required to supply you with a good faith estimate of all associated closing costs. You’ll receive an estimate of these closing costs in the loan estimate document, which you’ll typically receive within three days after applying with a prospective lender. You’ll receive your final closing disclosure three days before you close, which will outline all fees and any necessary minor adjustments.
Some of the most popular mortgage closing costs you’ll see include:
- Annual assessments
- Application fee
- Appraisal fee
- Assumption fee
- Attorney fee
- Credit report
- Discount points
- Home inspection
- Homeowners insurance premiums
- Lender’s title insurance
- Origination fee
- Mortgage broker fee
- Mortgage insurance application fee
- Notary fees
- Owner’s title insurance
- Prepaid interest
- Proration of cost shares
- Private mortgage insurance (PMI)
- Property taxes
- Title search fee
How much are closing costs?
If the long list of closing costs has you worried, you should know that you won’t always see all of these fees on your closing documents. You should also be aware that at times, many of these fees are bundled together under one line item. These are the same fees all other home buyers or refinancers pay. On average, the total of all these costs comes to around 2% to 5% of the price of the home.
For example, let’s say you are purchasing a $400,000 home. Your closing costs will most likely be between $8,000 and $20,000. Where you fall within this range will depend on your lender, the state where the home is located and the type of loan you are using.
4 Ways to save on closing costs
Closing costs can carry a bit of sticker shock on top of what is already most likely the largest purchase of your life, but there are ways you can mitigate these costs and work to make them more manageable.
1. Do your research
The first and most important way you can lower closing costs is by aggressively shopping potential lenders. Each lender will have a different list of the closing costs they charge, and the rates for each line item may be quite different. Remember, even a few small percentage points can make a difference in the cost of your refinance or home purchase.
Once you settle on a lender, don’t be scared to look through the loan estimate document and closing disclosure document with a magnifying glass. If you find fees that don’t make sense or seem like double charges, ask your lender to explain. Often, a lender is not willing to lose a deal over a fee that you’re concerned about. The worst they can say is no.
2. Outsource service partners
You can also save on closing costs by outsourcing some services to vendors of your choosing. Lending companies will push to use their preferred service partners for many of the different closing costs. However, if you’re able to find a competitor that will charge less, you can negotiate to use them to save some money.
3. Have the seller pay some of the costs
While not as common as many people think, you can try to get the seller to cover some or all of the closing costs. This can be accomplished by the seller paying them outright or by lowering the cost of the home by the amount of the closing costs. If you’re purchasing from a seller who is desperate to get out of their home and make a sale, you may have significant leverage to shift some or all of these costs. Again, the worst they can say is no.
4. Take advantage of assistance programs and grants
You may also be able to get help with your closing costs by taking advantage of assistance programs or grants. These programs are sometimes offered through your lender or by third parties to help cover the costs associated with closing. While each program is different, the intent is the same — to help you cover the expected or unexpected costs associated with securing your mortgage.
The bottom line
Closing costs are part of the home buying or refinancing process. Understanding the nature of these fees will put you in a much better position to plan and potentially negotiate a more favorable deal. Remember, lenders and sellers are vying for your business, so you do have some leverage when it comes to what you agree to. If a lender is unwilling to provide you the terms you’re looking for, shop elsewhere for one that will.