If you’re thinking about buying a home, then you should know that you will need ready access to cash to pay closing costs. It would be nice if you could go through the home-buying process without needing any cash, but that unfortunately isn’t the way it works. It’s important that you understand what closing costs are so that you won’t be surprised with unexpected costs. Knowing what to expect is key to having enough cash on hand to deal with any closing costs you’re required to pay.
💲 Overview of Closing Costs
In addition to your down payment, you will have to pay closing costs. These are miscellaneous charges that you will have to pay to those involved in the transaction. Your lender will provide you with a Good Faith Estimate which lets you know which closing costs you will be required to pay and the amount. Although the estimate may be a little off, it is close to the amount you will need to close your loan. The following items are likely to be listed on the estimate:
- Origination Fee: The fee charged by your lender for making the loan.
- Discount Points: The fee charged by your lender in exchange for a lower interest rate.
- Credit Report Fee: Your lender will charge a fee to pull your credit report.
- Private Mortgage Insurance: You’re required to purchase this insurance if your down payment is less than 20% of the purchase price. Such insurance protects the bank should you default on the loan.
- Initial Interest: You will be required to pay the interest starting on the date you close on your loan until the end of the month.
- Title Services and Insurance: You will have to pay for a title insurance policy to protect your lender against any claims against your home. Even if you don’t use a lender, you’ll still be required to pay the title company for their services.
- Title Insurance: This insurance will protect you against liens and claims against the home. The seller typically pays this cost.
- Property Taxes and Homeowner’s Insurance: Your lender will collect property taxes and homeowner’s insurance as part of your monthly payments. These amounts will go into an escrow account and payments will be disbursed to the taxing authority and insurance company when payments are due.
- Appraisal: Your lender will require an appraisal of the home for you to obtain the loan because they want to ensure your home is worth the loan amount you are requesting. You will pay this fee directly to the lender for third-party appraisal services.
- Survey: A surveyor will charge a fee to draw the boundary lines around your property.
- Recording Fees: Every municipality will charge fees for recording the purchase and may also collect taxes on the sale.
- Attorney Fees: If you have an attorney, you will need to pay fees charged for their services. Most buyers don’t use an attorney since standard contracts are often used.
Closing costs can bring about surprise expenses that can delay the process if you’re not prepared to pay. Therefore, understanding the closing costs involved is essential to ensuring the process leads to a successful conclusion.
💡 Tips Regarding Closing Costs
Seeking information regarding closing costs so that you are an informed buyer is the smart way to approach the home-buying process. The following tips can ensure there are no surprises when you close on your loan. You may also be surprised to know that you could save money on closing costs.
- Ensure you obtain a Good Faith Estimate and Settlement Statement. Compare the figures with typical closing cost figures. If you have any questions, contact your lender or real estate agent.
- Combine some of the closing costs with the loan. If you find yourself short on cash or you want the extra cash for other purposes, some lenders will roll some of your closing costs in with the loan. You will have to be able to qualify for a larger loan and your home will have to appraise at the higher amount.
- Ask the seller to pay some of the closing costs. This is a common arrangement between buyers and sellers. All you need to do is ask. The worst that will happen is the seller won’t agree to it.
Don’t let closing costs surprise you. Make sure you fully understand what closing costs are and how much you’ll be required to pay so that you can close on your loan without any delays. You do not want any surprises on closing day.