When getting ready to buy a home, most would-be new homeowners focus on saving up a down payment. While that’s important, coming up with enough cash for a down payment is only part of the picture. Until you also save enough to cover all your closing costs, you aren’t financially prepared to purchase your home.
What are closing costs?
Closing costs are a summation of the additional fees you will pay when it comes time to close on your house. Your down payment is not included in closing costs, . For a rough estimate to use while budgeting, assume closing costs will be anywhere from 2% to 5% of the contracted home prices.
Your closing costs will be a combination of a number of different charges made by the title company, home appraiser, your lender and other third parties involved with the transaction. While these various fees accumulate during loan processing, they are tallied and paid all at once when you have your closing. The closing attorney will ensure that closing costs are paid to an independent escrow company, which then distributes the fees to the correct parties. It is meant to streamline a process that would otherwise have you paying each vendor individually.
What’s included in closing costs?
Now that you know what isn’t included in closing costs–namely, your down payment–let’s look at what is included.
Closing costs include just about every other upfront fee accumulated during the process of purchasing a home. The list can be quite long, but you will see these fees included on your standard loan estimate shared by the lender.
Some of the most common fees associated with closing costs are:
Origination fee. Sometimes referred to as a broker fee, it typically runs about up to 1% of the loan amount. This is the fee the lender is charging for services. Because it’s primarily overhead and profit, it can be negotiated and should be compared among lenders.
Mortgage or discount points. These also typically run up to about 1% of the loan amount, but they are optional. They are paid to lower your mortgage rate, with the lender restricted from using them for overhead or profit.
Underwriting fees. These fees helps to pay the lender’s staff that are in charge of gathering necessary documentation, coordination with third parties and review the loan for final approval. These will vary, but expect them to run from about $300 to $1,000 and possibly more.
Title search/title insurance. These fees cover the process of checking historically records to be sure a clear title can be transferred legally to you. They can vary greatly, from a few hundred dollars way up to $2,500 and more.
Escrow fees. These can run anywhere from about $350 to over $1,000 and are paid to the company handling the escrow for your home purchase.
Appraisal. Unless you’re a cash buyer, you will need to have a home appraisal done. You can anticipate an additional $500 to $1,000 or more will need to be added to your budget.
Prepaids. These refer to the prepayment of your property taxes and insurance, prorated based on the date you close. These can also vary widely, typically anywhere from about $1,000 on up to $4,500.
If you have a government-backed loan, you’ll also pay some additional fees. These include an upfront mortgage insurance premium for USDA and FHA loans of 1% an 1.75% of the loan amount, respectively. These fees, however, can often be rolled into your mortgage. You should check with your lender regarding your options.
Here’s the bottom line
Closing costs can have a tremendous impact on how much cash you will need to close the deal on a home purchase. If you are planning to save up about 3% to 5% for a down payment for a home purchase, for example, consider doubling your efforts. You will need about twice that amount to cover your down payment as well as your closing costs. Coming to that realization after you already went under contract on a home is not a pleasant surprise.
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