Once you’ve saved money for a down payment, narrowed down on a house you wish to buy, and received approval for a mortgage, having to deal with closing costs might catch you by surprise. This is because these closing costs can amount to be a tidy sum. No matter whether you wish to purchase a home or get your mortgage refinanced, you will need to pay closing costs.
Closing costs may vary depending on the state in which you reside, the type of mortgage you get, and your mortgage provider. Typically, on a home purchase, they range from 2% to 6% of a home’s selling price. For example, if you buy a house for $150,000, closing costs may vary between $3,000 and $9,000.
Closing costs are typically categorized into property-related fees and mortgage-related fees. While the former relate to expenses incurred by lenders in evaluating properties, the latter refer to costs involved in processing your mortgage application.
The law requires lenders to provide Loan Estimates within three business days of receiving mortgage applications. In addition to other important information related to your mortgage, it also indicates estimated closing costs. While these are not exact numbers, they give you a fair indication of what you might expect to pay.
You should receive a Closing Disclosure form from your lender three days before the date of the actual closing. This includes the originally estimated costs as well as the final costs. If you notice a significant discrepancy between the two, consider contacting your real estate agent or lender sooner rather than later.
Data released by ClosingCorp in March 2021 highlights how average closing costs for purchase mortgages in 2020 varied across the U.S.
At the closing table, buyers, as well as sellers, have financial obligations to settle. Local and state rules tend to have a bearing on just how much they need to pay during closing. While a buyer is typically required to pay loan-related costs, a seller needs to pay commissions owed to real estate agents and other fees related to transferring title to the property.
In case you’re refinancing your existing mortgage, you alone are responsible for all closing costs. According to an official statement released by the Mortgage Bankers Association, people refinancing their Fannie Mae and Freddie Mac mortgages will now be burdened by a 0.5% adverse market fee.
Real estate transactions are not particularly straightforward and tend to involve multiple stakeholders. Various states across the country require more than basic home inspections where you hire inspectors on your own, and this hold true for some types of mortgages as well. In addition, you also need to pay for different services right from when you apply for a loan to its final closing.
Below are some of the most common closing costs that will find mentioned in the Closing Disclosure form provided by your lender.
If you get a United States Department of Veterans Affair (VA) loan, you need to pay a loan funding fee, which is a percentage of the amount you borrow. The fee varies depending on an applicant’s military service classification. This fee does not apply for some service members.
Getting a United States Department of Agriculture (USDA) loan requires that you pay an upfront guarantee fee of 1% of the loan amount. This is in addition to the 0.35% annual fee.
People who get Federal Housing Administration (FHA) loans need to pay an upfront mortgage insurance premium (UPMIP). It stands at 1.75% of the loan amount. You may pay this at closing to choose to roll it into your mortgage. An annual insurance premium of 0.45% to 1.05% also applies.
Points refer to optional upfront payments that borrowers make to lenders with the aim of reducing their interest rates. One discount point amounts to 1% of the amount you borrow. When mortgage rates are low – as is currently the case – paying for discounts points might not be in your best interest.
If you plan to get a mortgage to purchase a home or to refinance an existing mortgage, you will have to pay closing costs of different types. However, while there is nothing you can do about costs surrounding paying taxes, you may try to lower some expenses during closing.
If you’re a first-time buyer, know that you negotiate with the seller to include closing costs into the sales price. Consider this – a seller wants $150,000 for a home, and the purchaser’s closing costs amount to around $5,000. By making an offer of $155,000, you can get a credit to cover the closing costs. This way, while the seller stills gets the money that is rightfully due, you get to lower out-of-pocket expenses at closing. As a buyer, you may even try to negotiate a credit on closing costs with your lender in lieu of a slightly higher interest rate.
Prospective homebuyers who are unable to afford closing costs may consider seeking homebuyer assistance through loan programs or grants provided by local and state government bodies as well as their employers.
Getting in touch with a lender and speaking with a loan officeris the first thing you should do when trying to determine all the costs you might incur when buying a home. That is one of the main reasons why most experts suggest getting preapproved before beginning your search for a home. Given that different factors go into determining how much you might need to pay as closing costs, you need to be as specific about your requirements as soon as possible with your mortgage provider.
It is fairly common for buyers to underestimate closing costs, which is why it is best to get an indication in advance. Doing so also helps you budget for these costs accordingly. While most buyers prepare themselves to account for the actual cost of their homes, many end up dipping into their savings to cover closing costs. Fortunately, reducing the overall cost of your mortgage, as well as its closing costs, is possible if you pay your cards right.
30-YEAR FIXED-RATE MORTGAGE: THE PAYMENT ON A $200,000 30-YEAR FIXED-RATE LOAN AT 3.875% AND 80%LOAN-TO-VALUE (LTV) IS $940.14 WITH 0 % POINTS DUE AT CLOSING. THE ANNUAL PERCENTAGE RATE (APR) IS 4.026%. PAYMENT DOES NOT INCLUDE TAXES AND INSURANCE PREMIUMS. THE ACTUAL PAYMENT AMOUNT WILL BE GREATER. SOME STATE AND COUNTY MAXIMUM LOAN AMOUNT RESTRICTIONS MAY APPLY.
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