Congratulations! Closing costs are an indicator that you’ve come that much closer to buying your dream home but no one likes paying them. How much are closing costs? These costs vary depending on the total purchase price and are paid to 3rd parties when you take out a mortgage. There are several factors that are included in closing costs but they tend to fall somewhere between 2% and 7% of the home’s purchase price on average. Since things can get a little tricky from here, let’s do a deep dive into what are closing costs and how to prepare for them.
How Much are Closing Costs
Whether you are looking to refinance your current home or a first-time buyer for a new one, closing costs are unavoidable. If you’re taking out a mortgage for a home purchase so it’s best to plan ahead. The best way to do so is by having a thorough understanding of what they are. They are a culmination of title search and insurance, government processing fees, attorney fees, lender costs, taxes, and homeowners insurance. While many of these costs are not negotiable, you have some room to maneuver with others. We’ll take a look at what each of these are and where you may get some relief from.
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Title fees – These fees don’t change much and account for over 70% of all closing costs. It is recommended that you do your homework when searching for title services that include title insurance, search, and settlement services. Title insurance fees are very similar regardless of what company you go to. However, settlement fees can vary greatly and it’s important to know what is being covered like courier fees and title search. You’ll be required to purchase title insurance that covers the mortgage. It is also recommended that you purchase owner’s title insurance to protect your investment. These two types of insurance provide enough protection to prevent claims against the home.
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Lender fees – Many lenders combine all costs into an origination fee while others separate them into administrative fees, appraisal costs, credit check, transfer taxes, underwriting fees, processing fees, courier fees, and flood certification fees if required. Now, many lenders are offering discount points. This optional fee is used to lower your interest rate. You’ll want to explore this thoroughly with your lender if you have enough cash to cover all closing costs.
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Homeowners insurance and property taxes – At closing, you’ll be expected to pay for 1 year of homeowners insurance with an additional 2 months to be kept in reserve. You’ll also be required to pay 6 months of property taxes in advance. Depending on the location, this may add up to several thousand dollars. Lenders will require you to set up an escrow account to collect these fees but exemptions may be made if you make a down payment of 20% or more. If you’re planning to move into a condominium or townhome, you may have to pay association fees upfront.
To bring these costs down, you’ll want to shop around for a good deal while considering coverage and deductibles. Closing costs in Scottsdale range between $2,400 and $5,400 for average homes priced at $200,000 and $300,000. The percentage of closing costs to home sale prices is 1.21% to 1.82%. The best way to accurately estimate these costs is to utilize a closing cost estimator. You can find this tool on the internet and choose the mortgage type to match your current circumstances.
Who Pays Closing Costs
Having to fork over thousands of dollars after you’ve already made the down payment and received a pre-approval is a tough pill to swallow. The good news is that you won’t have to pay it all by yourself! Certain costs can’t be changed like property taxes and transfer fees but you can certainly reduce the others. There are two types of closing costs that include buyer -paid and seller- paid closing costs. Sometimes, you can negotiate with the sellers to have your closing costs financed into the mortgage to lower your immediate out – of – pocket costs at closing. Some other strategies for reducing closing costs are:- End of month closing – The best and simplest way to reduce closing costs is to close at the end of the month. This will minimize the amount of per diem interest you pay.
- Loyalty programs – If you’re already a customer of a particular bank, you’ll want to take advantage of their loyalty programs that may offer a reduction of origination fees or discount points to “preferred members”. These programs are meant to reward current customers for repeated business.
- Seller pays – Did you know that many loans allow sellers to offer up to 6% of the purchase price on a home? It is contributed as a closing cost credit and a way to seal the deal. It is also a tax deduction for the seller but this may not be a good strategy when inventory is low.
- Financing – As mentioned before, closing costs can be added to the mortgage and financed to keep money in your pocket. It may cost more but can provide relief when purchasing a home for the first time. The lender will cover the fees but the mortgage payments will increase with a higher interest rate.
- Military benefits – Members of the military and veterans can use their benefits to purchase a home. There are several programs that cater to service members so it’s best to do your research to take full advantage of these options.
- FHA loan – These loans are for families with lower incomes and are backed by the government. They generally require a lower credit score and down payment to qualify. FHA loans generally are backed by 3rd parties that can provide help with up to 6% of the loan.
- Unions and employment – Nowadays, many unions offer help with closing costs in the form of rebates and discounts. Many employers provide help with closing costs in the form of down payment assistance and other home purchasing programs with preferred partners.
Paying Cash for a Home
When you’re paying cash for closing costs, the amount is significantly lower but you’ll still be required to pay these fees:- Title insurance
- Appraisal
- Home inspection
- Processing and filing for County Recorder
- Real estate transfer taxes
