Everything You Need To Know About Closing Costs, But Were Afraid To Ask
Buying a house often comes with its fair share of surprises. And while many of them cannot be avoided, you can at least lessen the impact of others by preparing for them. One of the biggest surprises that befall many first-time homebuyers (and even some experienced home buyers) is closing costs.
So, what are closing costs and what are they not? Who pays them and when? Many home buyers have these questions, so there is no need to be embarrassed about it–but just in case, here is everything you need to know about closing costs, but were afraid to ask.
What Are Closing Costs And How Much Are They?
Closing costs can vary widely based on several different factors, including location, property type, and the type of loan you choose. Likewise, many different fees and charges are folded into the closing cost, including title insurance, inspections and appraisals, and prepaid insurance, as well as various fees, such as application, loan origination, and government recording fees. Typically, homebuyers can expect to pay between 2% to 5% of the total purchase price of their new home in these closing fees. Knowing this estimate going in will help determine what you can afford and how much you will have for the down payment as well.
Closing Costs Are Not The Same As A Down Payment
And speaking of down payments, an important thing to remember is that closing costs are not the same as, or included in, the down payment. And while both are typically paid around the same time, the down payment is not a part of closing costs. A down payment is the amount of money to your mortgage lender as an advance payment. Closing costs cover a variety of things and the money goes a variety of third-party sources, including the bank, appraisers, and lawyers. Closing costs must be paid whether or not a down payment is also made.
You Have Options For Paying (Or Not Paying) These Costs . . . Sometimes
If you don’t have much cash on hand, it might be best to save whatever you have for a down payment or other moving/new home expenses. One way to accomplish this is to negotiate a no-closing-cost mortgage, which enables you to finance your costs through a higher interest rate on your mortgage. This is not ideal and will cost you more down the line, but for cash-strapped buyers, this may be a tempting offer.
Another, more lucrative avenue, is to negotiate the seller paying for all–or at least some–of the closing costs. If they are motivated to do this, they can either pay out-of-pocket or cover the cost through a seller’s concession, which basically tacks the closing costs onto the sale price, which the seller then returns the difference to you at the closing. This frees the buyer up to put more cash in for the down payment.
Closely Review Your Loan Estimate And Closing Disclosure
Prior to the actual closing, your lender will give you a loan estimate detailing the anticipated costs. Certain aspects of the estimate are subject to change and even negotiated down, while others, such as the loan’s interest rate, are now fixed.
Once you receive the Closing Disclosure, carefully review and compare it to your Loan Estimate. It is prudent to go through every fee to make sure you’re not being overcharged. If you don’t understand something or find discrepancies between the forms, ask the loan officer to explain. Do not be satisfied until you fully understand every detail. These forms were developed by the Federal Consumer Financial Protection Agency as a way to help you better understand your mortgage and estimate the costs you will have to pay.
Closing costs are a crucial, but often overlooked step in the home buying process. By researching and examining these expected costs, you are ensuring a more confident and informed home buying decision. At Stanley Martin Homes, we are committed to helping you throughout the entire lending process.
Our trusted lending partners diligently work to find the right financing package for your financial situation and educate on all of the costs associated with closing. Whether you are just starting your search or getting ready to make an offer, understanding and anticipating the costs included with closing will surely save you from a surprise (and headache) when it comes time to finalize the deal.