What Are Closing Costs?
Your closing costs might seem like they're set in stone, but actually, there are steps you can take to minimize these final costs. Let’s take a look at how you can master the last steps of your mortgage process.
Closing Costs Defined
Closing costs are the processing fees associated with closing your mortgage. Closing costs include fees for things like securing the title for your new home or scheduling a home appraisal. When you close the loan, your lender will collect money from you to cover the cost of these services.
As a general rule, closing costs can make up about 3 – 6% of the price of the home. For example, if you buy your dream property for $150,000, the closing costs could be anywhere from $4,500 to $9,000.
You may not have to bring that lump sum to the table when you close your mortgage. Often, you can roll your closing costs into the loan amount, financing them as part of your loan. When you’re buying a home, you may be able to negotiate for the seller to pay for closing costs as well.
The terms of your mortgage and the specific services needed play a large role in how much you’ll pay at closing. Here are some examples of fees and costs often due at closing:
- Appraisal: Your lender will hire an appraisal management company to inspect the home and determine its value. Most appraisers charge $300 – $500 for their services.
- Title/attorney fees: These include government filing fees, escrow fees, notary fees and other expenses related to transferring the deed. The cost varies significantly from state to state.
- Escrow fees: Your lender may set up an escrow account so you can pay property taxes and homeowners insurance as part of your regular mortgage payment.
- Lender fees: These will cover administrative fees, like pulling your credit report and wire transfer fees.
- Loan interest: Interest on the loan will be prorated from the closing date to the first of the following month.
- Flood certification: If your home is on or near a flood plain, you may need to pay around $15– $20 for a certification from the Federal Emergency Management Agency (FEMA).
- Discount point fees: If you purchased discount points to secure a lower interest rate, you’ll pay for them when you close the loan.
Though closing costs vary, the majority of these fees come from title-related services. A title assures you that the property you’re purchasing can be sold to you in full and that no one else owns the house or is documented in the deed.
Title companies are also responsible for issuing title insurance, which covers any legal fees that may arise if disputes on property ownership require legal action in the future.
How Will I Know What My Closing Costs Will Be?
After you complete a loan application, your lender will provide you with a Loan Estimate – a standardized document that breaks down all the costs and fees. This gives you a preview of your closing costs; the costs may change slightly as your lender works on finalizing the details.
Before your official closing date, you’ll also receive a Closing Disclosure. This will list your final costs in detail so you know what you’re responsible for paying.
Do Your Personal Finances Affect Closing Costs?
There are many factors that impact what you’ll pay for closing costs. Closing costs aren’t directly determined by your personal finances, but factors like the type of loan you’re getting, the size of the loan and whether you’re paying mortgage discount points can all play a role.
FHA and VA loans, for example, require inspections that conventional loans typically don’t. VA loans come with a cap limiting how much a lender can charge in fees and closing costs. If you’re buying a rural property, your appraisal may simply cost more than an appraisal for a home in the suburbs. These are all ways that your property and loan can change how much you’ll pay for closing costs.
Your closing date can also change how much you owe. Your closing costs will likely include prepaid interest charges, which cover the interest you’ll accrue between closing day and the date of your first mortgage payment. Closing earlier in the month could mean you’ll pay more for prepaid interest than closing later in the month.
Who Pays Closing Costs?
Both the buyer and seller can be responsible for closing costs. As a buyer, you can ask the seller to pay for some or all of your closing costs when you make your offer. Let’s take a look at some common closing costs.
Buyer Closing Costs
- Title search fees: These fees ensure that no one besides the seller owns the property and that it can legally be sold to you.
- Survey fees: You may need to survey the land for size, which adds in a closing fee.
- Credit report fees: Your lender checks your credit to evaluate your loan application.
- Title insurance fees: Title insurance protects the lender and buyer from any costs from future legal action that questions the home’s true owner.
- Inspection fees: Certain loan types require an inspection of the property to make sure it’s in livable condition. Those fees may be paid as part of your closing costs. However, if you hire your own home inspector, you’ll pay the inspection fee directly to them.
Seller Closing Costs
- Real estate agent commission: Sellers typically pay commission for real estate agents on both sides since it comes out of the home’s sale price.
- Title insurance fees: Both the seller and buyer have a part in title insurance fees. The seller usually pays the owner’s title insurance premium.
- Recording fees and transfer taxes: The government, whether at the local or county level, charges fees when a property changes hands. The seller is typically responsible for paying these.
- Attorney fees: If the seller has an attorney present at closing, they’ll be responsible for any fees associated with the attorney’s services.
Can I Roll Closing Costs Into My Mortgage?
Closing costs can sometimes be rolled into your mortgage, but this is more common with a refinance than a home purchase. Whether or not you can roll closing costs into your mortgage depends on factors like the loan type, your debt-to-income ratio (DTI) and your loan-to-value ratio (LTV).
Your DTI is used to measure how much monthly debt you’re carrying relative to how much income you’re bringing in each month. Rolling your closing costs into your loan increases your monthly payment, which raises your DTI. Your DTI can’t exceed the maximum allowable DTI for the loan you’re getting.
Your LTV is the loan amount divided by the value of the home. For example, if you were to get a mortgage for $100,000 on a home worth $150,000, the LTV would be 66%. All loans have a maximum LTV. For conventional loans, the maximum LTV is 97%, while for VA loans, it’s usually 100% (although it can actually be higher if you’re refinancing). You won’t be able to roll closing costs into your loan if it increases your LTV past what your loan type and lender allow.
Should I Roll Closing Costs Into My Mortgage?
If you don’t have the funds to pay upfront closing costs, rolling them into your mortgage might be a good option. If you can handle a slight bump in your monthly payments and don’t mind paying interest on this expense through the life of the loan, rolling in your closing costs could be right for you.
How To Lower Closing Costs
The closing costs you’re expected to pay will be reflected in your Loan Estimate. Here are some ways you could lower those costs.
Negotiate With The Seller
In some cases, you may be able to negotiate that the seller pays part or all of your closing costs. If they haven’t gotten many offers, or if they’re motivated to sell, they may be willing to pitch in to close the deal.
Play The Field
If your loan requires inspections or surveys, you may be able to find more cost-efficient service providers than the ones your lender would hire. Ask your lender if you can hire a different provider to save money.
When Are Closing Costs Due?
Closing costs are usually due on closing day, which is when you sign your final loan documents. In most cases, you’ll be asked to bring a certified check or cashier’s check with you to the signing.
Closing costs usually come out to about 3 - 6% of your home's purchase price and include different fees for processes and inspections. Understanding what you’re being charged for can help you be prepared for the costs of buying a home or refinancing – and maybe even save money. When you’re ready to start your new mortgage, apply online with Rocket Mortgage® by Quicken Loans®.
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