When someone is in the process of buying a home, they will come across closing costs at some point. So, what exactly are closing costs, and why are they important for home buyers to know about?

Closing costs are the expenses that come with buying a home, paid at the closing of the transaction. These expenses are usually covered by the buyer alone. The amount of closing costs can vary, but they typically range from 2% to 5% of the home's purchase price. For example, if a house costs $300,000, the closing costs would be between $6,000 and $15,000. It is important to check with your lender about closing costs for your specific circumstances, as this range may not always apply.

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Breaking Down Closing Costs

The property title is transferred to the buyer at the end of the home-buying process, making them the legal owner of the home. This is when closing costs are expected to be paid. Closing costs can vary, based on things such as location, the lender, and the property. Buyers should receive a loan estimate from the lender within three days of applying for a mortgage, which outlines the estimated closing costs. This enables them to budget accordingly.

Closing costs can include, but are not limited to:

  • Appraisal Fees: Before approving a mortgage, the lender will require an appraisal of the property to ensure that the purchase price is justified.
  • Association Fees: Association fees, also known as homeowner association (HOA) fees, are regular payments to cover maintenance and upkeep of things such as shared walkways, parking lots, and more.
  • Attorney Fees: In some states, it's customary for an attorney to be involved in the closing process. Attorney fees cover the legal aspects of the transaction, including reviewing the purchase agreement and other documents for potential association fees.
  • Escrow Account: Homebuyers should also consider the need for an escrow account. This third-party system may hold funds until certain mortgage requirements are met. Escrow accounts may be required by the lender to cover items such as property taxes and homeowners insurance.
  • Homeowners Insurance: Lenders require the buyer to obtain homeowners insurance to protect the property against damage or loss. The buyer will need to pay for the first year's insurance premium at closing.
  • Loan Origination Fees: This is the fee from the lender for the loan. It usually includes the cost of underwriting, preparing the loan documents, and other administrative expenses.
  • Property Taxes: Depending on the closing date and the location of the property, the buyer may need to pay a pro-rated amount of the property taxes for the remaining part of the year.
  • Rate-Related Fees: A home buyer can buy down a rate with points to obtain a lower rate, and they can pay that fee once they reach closing.
  • Recording Fees: These fees cover the cost of recording the home purchase with the local government, making it a matter of public record.
  • Title Insurance: Title insurance protects the buyer and the lender from issues with the property. This is broken up into owner's title insurance and lender's title insurance.

How Can Someone Lower Their Closing Costs?

Closing costs don’t need to pile up if a buyer is prepared. In some cases, buyers may be able to negotiate with the seller to cover a portion of the closing costs, but this must be agreed upon and detailed in the purchase agreement.

A buyer can work towards lowering and preparing for their closing costs by:

  1. Negotiating with the seller to cover some of the expenses
  2. Comparing loan estimates from different lenders to determine the best fit
  3. Understanding each fee to see if there are any they can negotiate for
  4. Research typical closing costs in the area
  5. Set aside funds specifically for this purpose when budgeting
  6. Enroll in down payment assistance programs or income based/first time home buyer grants

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