Closing on your first home can be overwhelming. Not only is it a huge financial step, it also comes with a mountain of paperwork and even more costs when it’s finally time to close. Most buyers (even on their second or third home) forget about the closing costs they’ll need to have in addition to the down payment. It’s a realization that, when it comes, can feel like a sucker punch.
Closing costs and fees cover a lot of expenses associated with your loan. They usually total between 3 and 5 percent of the loan amount. So if you agree on a price of $200,000, you’ll be looking at somewhere around $6,000 to $10,000 for closing costs. You’ll get a better estimate after you submit the loan application and are provided a good faith estimate from the lender.
The good news is that most closing fees are a one-off: you won’t have worry about paying them again until you buy another home. Closing fees typically include
- Loan origination fees and underwriting to pay for the lender’s time evaluating and working on your loan
- Application fees to cover the cost of processing your loan application
- Costs for pulling credit reports (sometimes wrapped into application fees)
- Appraisal charges which lenders require before proceeding with your loan
- Title search and title insurance to protect you and the lender from any claims against your home
- Mortgage insurance, which you generally won’t need to worry about if you’re placing a down payment of 20 percent or more
- Discount points, which are prepaid finance charges required by your lender at closing that can lower your interest rate
- Initial interest to cover the period of time between the date you close and the end of the month
- Recording fees to enter the transaction into city or county records
- Homeowner’s insurance (a cost that will continue as long as you own the home)
- Attorney fees if the buyer has an attorney involved
In most cases the buyer pays the closing costs. Some home buyers will roll closing costs into the mortgage loan. You need to be careful with this path, however, because your loan can’t exceed your loan-to-value ratio, the amount of your loan compared to the value of your house. Some home buyers ask the seller to share the closing fees via a credit (which the seller may or may not be willing to do), and others will negotiate with the lender to cover closing costs in exchange for a slightly higher interest rate. Additionally, some lenders say they’ll give you a mortgage without closing costs, but as always, it’s buyer beware, so be sure to shop around.
Your best bet when considering closing fees, is to ask your real estate agent about expected amounts and options should it be difficult for you to gather the cash. Most agents have been through dozens of home closings and can advise you regarding the pros and cons of all your options.