Buying a home can be an excruciating task. You've examined all the available home options, secured a financing option, made an offer, inspected the house, and you're working out a deal with the seller.
Congratulations, you're just about to be a new homeowner.
However, there are closing costs that many don't consider when buying a house when closing the deal. That begs the question:
What are Closing Costs in Real Estate?
Closing costs are fees that a home buyer and seller pay to different third parties when closing the deal. The costs are numerous and can quickly mount up.
When you buy a home, closing costs come from:
- Fees that stem from owning a new home.
- Fees that go to mortgage lenders.
The amount you pay for closing costs varies depending on your state and the mortgage lender's fees.
On the flip side, a seller's closing costs entail:
- Title transfer fee to the buyer.
- Real estate agent's commission.
Who Pays Closing Cost?
Both buyers and sellers incur closing costs. However, homebuyers pay more in closing costs than sellers. A seller might sweeten the deal and offer to partially or fully pay for the buyer's closing costs in rare situations.
How Much are Closing Costs?
The amount you pay for closing costs depends on the type of property you're buying, your lender, and your state. On average, you'll spend 3-4% of the purchase price in closing fees if you're a buyer, and 1-3% for a seller, excluding the agent fee.
Types of Closing Costs for Buyers (and How Much to Pay)
There are plenty of unseen costs when buying a home. Fortunately, we're going to cover nearly all hidden costs that aren't on the house buying price so that the closing price doesn't surprise you in the end.
The main types of closing costs entail:
Home Inspection Fee
Home inspection fees vary depending on:
- Home size and age
- Scope of services
- Your region
However, the U.S Department of Housing says a typical range lies between $300-$500, depending on the property value and terms of investment.
The role of a home inspection is to ensure you're buying a home in good condition. If the inspector spots issues, you can raise them with the seller so that he can do repairs before the closing day.
Home appraisal costs are fees you incur when you hire a company to determine the house's value you're about to buy. Typically, home appraisal costs around $300 - $500.
Appraisal professionals ensure that the seller doesn't widely overprice or underprice a home. Determining the correct value is important to lenders because it ensures your financier lends an acceptable amount of money to buy a home.
Application/ Processing Fees
The processing fee is the amount that covers the cost of your lender for processing your mortgage application. The fee goes into processes like running credit checks, pulling your credit score, and other loan processing tasks.
Processing fees mount up to a few hundred dollars depending on your lender.
Mortgage Origination Fees
The mortgage origination fee generally costs about 1% of the total amount of the loan. You'll incur this fee because a mortgage involves lots of paperwork.
The amount you pay covers the lender's costs for creating your mortgage and processing all the paperwork that enables you to get money in time.
Prepaid Interest on Your Mortgage
On the day you close the deal, you'll pay part of your monthly mortgage interest to cover the period between the closing date and the first mortgage payment you scheduled.
Tax Service Fee
Tax service fees don't cost much. If the application fee doesn't cover the tax services fee, search for a third party to check your tax account and ensure that you don't have unpaid taxes and pay taxes on time.
The amount you pay for property taxes depends on your state's tax law. In North Carolina, expect to pay 0.77% of your home value a year. You'll pay a few months of property worth upfront.
Private Mortgage Insurance
On closing day, you'll pay a month's worth of private mortgage insurance upfront. Typically, you'll pay less than 2% of your annual loan balance for private mortgage insurance (PMI). Your lender splits the 2% into monthly payments.
However, private mortgage insurance costs are avoidable by paying a down payment of 20% or more. At its core, PMI is insurance that protects your lender from losing money if you can't keep up the monthly payments or you default on your mortgage.
Homeowners Association Fees
Suppose you're purchasing a house in a community with a homeowner association (HOA), you'll incur a membership fee on closing day. From there, you'll be paying around $250 a month to maintain your membership.
Homeowner's Insurance Premium
Types of Closing Costs for Sellers
It's easy to think that a seller will get off easier during the closing day. Selling a home comes with a closing cost too. If you're a seller, your highest cost on closing day is the commission fee for the real estate agent.
Real Estate Agent Commission Fees
On average, you'll pay 6% of your home sale price as a commission to your real estate agent. The listing agent and the buyer's agent split this fee.
A seller might negotiate with the buyer to pay the agent commission on rare occasions. Alternatively, the buyer may offer to partly or fully cover the agent's commission, especially when the seller gets multiple offers.
Transfer Tax Fees
As a seller, you'll incur the cost of title transfer to a new owner. The cost might also entail recording fees, depending on the title company.
You'll pay $1 per $500 for the property you're selling in North Carolina.
When an attorney helps you sell your home, their fee will be due on closing day. The amount you'll spend depends on the attorney you choose.
Is it Possible to Save Money on Your Closing Costs?
Nearly everyone buying or selling a home asks this question. However, your mortgage lenders are the people to answer that question correctly when you're ready to buy a home. Ask them if there's any room to wiggle to reduce their closing fee.
What's more, ask the seller if they can pay a small fraction of your closing costs. If they have been trying to sell their house for months and want a quick sale, they might agree because you hold the upper hand in the deal.
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