Mortgage closing costs, commonly known as closing costs, refer to the amount you must pay when completing a deal on the purchase of a property or refinancing an existing mortgage. The typical closing costs usually include service fees and other charges incurred in the process of closing a real estate transaction. This includes the real estate commission, mortgage insurance, property taxes, and other paperwork, such as title filings.
Third parties, such as your real estate attorney and your mortgage lender, have provided services during your house acquisition. Closing costs are the fees that these specialists (and others) charge for the services that are required to complete the real estate transaction and your home financing.
What is the Necessity of Typical Closing Costs?
Closing costs are the fees you pay to your lender for the processing of your loan. These costs are charged by lenders in exchange for the creation of your loan. Closing costs include items such as your home appraisal and title searches. The closing expenses you’ll have to pay will vary depending on the type of loan you get and where you live.
In general, closing costs are important since they finalize your legal ownership over the property, hence the term closing. Additionally, it also ensures your security by providing you with insurance and other legal necessities during the transfer, or even as you move in. As a bonus, it makes sure that you will be moving into a house that is ready for occupancy since services like home inspections are included. Basically, it’s beneficial to everyone.
Who Pays Closing Costs?
Closing costs are generally paid by the buyer. Under certain circumstances, however, the seller may be responsible for certain closing costs. For instance, the seller is expected to pay the commission fees associated with the sale, which are due to the real estate agents involved in the transaction.
Moreover, it is also not necessary for the buyer to worry about having to pay for title insurance or home warranty coverage since the seller will generally pay for them as well. On top of that, the seller also pays the transfer taxes and recording fees necessary for the official transfer of the property.
As you can see, sellers do contribute to closing costs as well, not just the buyer. Hence, there is always the opportunity for the buyer to negotiate with the seller about splitting certain fees, not just the ones given above. By doing so, he can then reduce his costs as much as possible.
How Much are Closing Costs on a House?
The average closing costs are between 3%-6% of the final sales price of a house or a property. Downpayments are not included in that figure. Clearly, a higher home purchase price will incur higher closing costs. Even so, there are many factors that determine closing costs when buying a house. It could be the type of loan you take out, local mortgage regulations, or even the state you reside in.
In Australia, for instance, closing costs are usually between 3% and 5% of an average home purchase price. Foreign buyers, however, will pay between 3% and 8%. The same applies if he is an Australian ex-pat living overseas and acquiring real estate with his spouse or partner.
How to Calculate Closing Costs for Buyer
There are different ways how to calculate closing costs for a buyer. One can estimate the closing costs by factoring out 3%-6% of the purchase price or taking into account various fees that might be associated with the process. Moreover, if you want to make things easier, you can use a closing costs calculator. With the widespread availability of a closing costs calculator, buyers can easily figure out their closing costs.
To give you an idea of how closing costs are calculated, let’s say the sale price of the house is $100,000. Based on the average closing costs these days, the estimated closing costs would be between $3,000 and $6,000. Alternatively, you can also make a price breakdown of the possible fees involved in the transaction and add everything up.
This can be anything from mortgage insurance to property taxes, as well as other loan-related fees. There is no need to fret, as each of these topics will be covered in more detail in the next section.
What are the Fees that Closing Costs Include?
There is a wide range of fees associated with closing costs, from taxes to paperwork. There may be variations depending on state laws, as well as the agreement between buyer and seller. Among the fees buyers are expected to pay for closing costs are the following:
- Property-Related Fees.
- Loan-Related Fees.
- Mortgage Insurance Fees.
- Property Taxes, Insurance, and Annual Fees.
- Title Fees.
The majority of these expenses can be negotiated, which is why it’s important for the buyer to reach out to the seller so that an agreement can be made. In the following section, we’ll take a closer look at each of these fees in order to better understand them.
1. Property-Related Fees
Property-related fees cover the various expenses incurred in evaluating a property. Depending on the contract, the seller may bear some of these expenses. The possible costs may include a survey fee, home inspection for pests, structural, or electrical problems, as well as a home appraisal fee.
A home inspection is one of the most important steps in the mortgage approval process. A professional home inspector will likely visit the property to inspect every point and corner of the structure. This is crucial, as it assures buyers that the property is ready for their occupancy. On the other hand, home appraisals are done by experts for a price as they determine the value of the property based on current market conditions.
2. Loan-Related Fees
Loan-related fees typically pertain to the costs associated with processing a mortgage. It can be anything from attorney to loan application fees, to mortgage broker fees or prepaid interest.
Basically, loan application fees are the costs involved in processing a loan request. The amount will vary widely depending on the lender and the amount of work involved in processing the loan application. In addition, some states require an attorney to handle certain aspects of the transaction, such as transferring the title from the seller to the buyer. It comes at a cost as well, since you need a professional to handle the task. The same goes for all other fees involved, such as the mortgage broker fee.
3. Mortgage Insurance Fees
Generally speaking, mortgage insurance fees cover the costs associated with the application and insurance of a mortgage. This type of fee protects the lender against a default on the loan. Apart from the application and insurance, there could also be other charges involved. For instance, when the loan is insured by the Federal Housing Administration, FHA mortgage insurance premiums must be paid.
4. Property Taxes, Insurance, and Annual Fees
In essence, the buyer is also responsible for paying the city and county property taxes due from the closing date up until the end of the tax year. Also included with the closing costs are homeowners insurance fees. This type of insurance covers any property damages, losses, or vandalism, so it’s basically a safety net for the property itself. Annual fees are also included in typical house closing costs. This is more common in condominiums or neighbourhoods with homeowner associations.
5. Title Fees
Title fees essentially include all costs associated with the title, such as title search fees. It is necessary to conduct a title search to verify that the property is clean. In essence, this ensures that the seller owns the property and there are no outstanding claims or liens against it. There may also be additional costs such as lender’s title insurance and owner’s title insurance may also be incurred. Basically, these fees protect the mortgage lender and property owner against any title issues or claims that may arise.
What are the Ways to Reduce Closing Cost?
It’s no secret that closing costs can be overwhelming as they can increase your expenses significantly. This is why it’s so crucial to learn how to negotiate your mortgage closing costs. Along with negotiating, there are also alternative options to go about it. Here are some of the ways to reduce closing costs:
- Plan to close at the end of the month.
- Make a request for assistance from the vendor.
- Examine the loan estimate and closing disclosure paperwork.
- Fees for individual loans should be negotiated.
- Closing fees should be factored into your mortgage.
In the following section, we will take a closer look at each of these in further detail.
1. Plan to Close at the End of the Month
In most closing costs, prepaid daily interest is charged to cover interest expenses incurred on the loan between the time of closing and the first payment due. When you’re having your closing at the end of the month will help you reduce your cash outlay by minimizing daily interest charges. In order to do this, plan ahead and ensure that you schedule your closing at a time when you have the opportunity to pay less upfront, which might be at the end of the month.
2. Make a Request for Assistance from the Vendor
If possible, consider talking to the seller and ask for assistance. Many vendors are amenable to negotiation, especially when the property has been in their hands for quite some time. You can either ask him to shoulder certain expenses or reduce the fee in some way. Thus, you’ll save a good sum since the amount will be deducted from your overall bill.
3. Examine the Loan Estimate and Closing Disclosure Paperwork
Make sure to read over the loan estimate and closing disclosure paperwork in order to understand the full scope of the transaction, including its terms and conditions. In this way, you can see every fee and understand why it’s there, as well as ask the seller for clarifications whenever you need them. In the event that the loan estimate is not given, remember that you can get it sooner if you wish.
4. Fees for Individual Loans should be Negotiated
Make sure to examine all fees to determine whether they can be negotiated or, worse if they are unnecessary. Clarify anything you don’t understand with the vendor and discuss duplicate charges. This will help you save money in the long run instead of committing to payment without making sure you know what the charges are beforehand.
5. Closing Fees should be Factored into your Mortgage
Try to put the closing costs toward the mortgage principal. By doing this, you will save money since you will be paying it along with the money you’ll borrow. Then you won’t have to pay a large amount all at once. Consider that this might be beneficial for the short term, so make sure to negotiate with the lender.
What are the Similar Terms to Closing Costs?
Since there are so many real estate investing terms today, there is no doubt there are various terminologies that are similar to closing costs. Here are just a few examples:
- Closing.
- Days on market.
- Principal.
- Purchase and sale agreement.
- Loan estimate.
- Due diligence.
- Earnest money deposit.
- Home sale contingency.
- Foreclosure.
- Home equity conversion mortgage.
This is just a brief glimpse of a few terms. Clearly, it’s important to know and understand each one so as to avoid confusion, especially in real estate transactions.