As you near the close of your new home purchase, closing costs may come as a surprise. But these closing costs are not small and should be expected by every home buyer. Knowing what these costs are and budgeting for them will make the overall buying experience go much more smoothly.
Closing Costs Explained
Closing costs are all of the fees and expenses required to close on a home loan. They come up as you get to the final step in the mortgage process, and must be paid for regardless of whether you're buying a new house, or refinancing an existing mortgage.
Home buyers pay the bulk of the closing costs, which range from 2%-5% of the amount of the loan. Sellers have a shortlist of closing costs as well, for example, commission to the real estate agent involved in the sale.
Some lenders will allow you to finance your closing costs by incorporating them into the mortgage loan. If you choose this option, you will end up paying more in interest over the life of the loan. Because of this, it's best to pay your closing costs upfront if you can. You might also be able to negotiate with the seller to pay some of the closing costs, especially in a buyer's market. There are also some states, cities, and counties that have low-interest loan grants or programs available to first-time buyers to help with closing costs.
Your lender will provide a Loan Estimate that outlines your closing costs when you apply for the loan. It's also available to you in the closing disclosure that's given to you a few days before settling the mortgage. Any questions that you have about your closing costs should be asked as soon as you receive your documentation.
What's Included in Closing Costs
The costs you pay at closing will vary depending on the type of loan, where you're buying a house, and other factors. Here are the common costs that are typically a part of closing fees:
- Appraisal. Lenders require an appraisal of the home to ensure it's worth the sale price. An appraisal will typically cost $300 to $500.
- Home inspection. Most lenders will also require a home inspection to verify that the home is in good shape and structurally sound. If you're getting a loan that's backed by the government, such as the VA loan, a home inspection is required to move forward with the purchase. Problems with the inspection may enable you to negotiate a lower price on the house, so you can afford to rectify the problems. If the problems are severe, you might also have the option to back out of the agreement. The cost of a home inspection on average is $300 to $500.
- Loan origination fee. This is the charge that lenders apply for evaluating and preparing your loan.
- Prepaid interest. This is the interest that accrues from the date of the settlement to the first monthly payment date of the mortgage. Your loan size will be a determining factor in how much you will pay.
- Assumption fee. If you're taking on an assumable mortgage from the seller, this variable fee could be charged for the balance left on the loan.
- Attorney fees. In some states, an attorney will need to be present at the closing of the purchase of the property. The number of hours the attorney works will vary, and this is what determines how much in attorney fees you will pay.
- Discount points. Paying points on your loan will reduce the interest rate over its life. In most cases, Each point you pay is equal to 1% of the loan amount.
Here's a calculator that can help determine your mortgage closing costs for a given set of loan terms. Do you have more questions about closing costs on home loans? Our experts at NASB are here to help. Give us a call at 855-465-0753, or click here to learn more.