Home Buyer's Guide to Closing Costs
Between the cost of a home and the cost of saving up for a down payment, individuals have a lot to save up for and plan for when looking to buy a home. However, there's another element in the home-buying process that represents an expense to the buyer: Closing costs. Closing costs are the administrative and legal fees associated with purchasing a home. There are many different fees that are paid when a house closes, and these fees are so numerous that they're lumped together in one large group, all to be paid together at once.
Who Pays Closing Costs?
Typically, the buyer pays the closing costs. Sometimes, buyers are able to negotiate with sellers to have them pay closing costs. First-time buyers often struggle to put down money for a down payment, moving expenses and closing costs, so in some markets, home sellers can be persuaded to pay. This may be more common in areas that attracts a lot of first-time home buyers.
Home buyers who want the seller to pay their closing costs must work closely with their real estate professional to get this negotiated. Some sellers are open to paying closing costs, others aren't.
When Are Closing Costs Paid?
Closing costs are paid when escrow closes and the house is ready to be bought. This usually happens about 30 days after the offer is accepted. If the buyer or seller has negotiated a longer escrow period, then closing costs are paid whenever escrow finally ends.
How Much Are Closing Costs?
Typical closing costs range from 2 to 5% of the value of the home. It's hard to anticipate in advance of making an offer exactly how much closing costs will be, so home buyers should plan to have at least 2 or 3% of the home's value on hand to pay at closing. The nationwide average closing costs are about 2.1%.
What Fees Are Paid With Closing Costs?
The fees that are paid at close of escrow depends on many factors including the state where the home is being sold, the practices of the lender and the circumstances of the home sale. Some of the most common fees that are paid include:
- Homeowners insurance. Typically, home buyers pay their first year of homeowners insurance at the time of closing.
- Escrow fee. This is a fee paid to the escrow company for their services.
- Appraisal. The appraisal is the fee that goes to the company that appraises the home.
- Credit report. The credit report is run by the lender when trying to determine the interest rate of the loan.
- Origination fee. This is a fee paid to the lender for their administrative costs.
- Recording fee. This is a fee paid to the local recording office for making the official record of the transaction.
- Underwriting fee. This is a fee paid to the lender for doing the research that determines whether the loan should be granted.
- Application fee. This fee is also paid to the lender to process the application for the loan.
These are just some of the most common fees. Other fees, like the attorneys fees and the Up Front Mortgage Insurance Premium (UPMIP) will vary depending on the state where the home is being purchased (not all states require attorneys to be involved) and the type of loan being taken out (not all loans require the lender to get UPMIP).
Can Closing Costs Be Negotiated, and When?
Many people do not realize that the costs and fees associated with a mortgage can be negotiated while shopping for a loan. Careful attention to these costs can save hundreds or even thousands of dollars at closing and throughout the life of the loan. The key is knowing what fees will be due and which ones can be negotiated.
Since 2015, borrowers have been able to receive a Loan Estimate that helps buyers better understand the mortgage process. This sheet includes the costs associated with the loan, which include lender fees, title insurance and other costs.
While some, like flood certification or the appraisal cannot be negotiated, others, like title insurance, can. Ask you lender if there is a chance that they will waive specific fees, such as the application fee. You can also look at offers from a range of lenders to see who offers the best price.
Contact a Lender to Learn More
Home buyers who want to know more about the closing costs that they can anticipate paying when the mortgage closes can work with an Anchorage lender to find out more. A knowledgeable lender can answer questions about closing costs and can also estimate the amount that the home buyer is likely to pay at closing.