Unmasking Closing Costs
Embarking on the homebuying journey is both exhilarating and intricate, with numerous steps to navigate before holding the keys to your dream home. Among the many terms and components you'll encounter along the way, one that often stands tall, casting a shadow of confusion, is 'closing costs.'
These seemingly elusive fees can be a source of anxiety for many prospective homeowners. But fret not, for today, we aim to shed light on this essential aspect of the real estate transaction. Through a deep dive into what closing costs entail, the various elements that comprise them, and their significance in your purchasing journey, we'll ensure you're well-equipped to approach the closing table with confidence, clarity, and a comprehensive understanding. So, let's peel back the layers and unravel the complexities of closing costs, ensuring you're not just informed, but empowered.
The Price Tag of Closing Costs
Now, let's talk numbers. Closing costs typically dance between 3% to 6% of your loan amount. For clarity, before the big day, you’ll receive a Closing Disclosure laying out the expected charges. Although both home buyers and sellers tackle these costs, sellers have some restrictions on the chunk of the mortgage they can foot, influenced by factors like loan type and down payment.
For instance, with conventional loans on a primary residence (the ones not cuddled by the federal government), sellers can contribute up to a certain limit, influenced by the down payment. Here's a breakdown:
25% (or more) down: 9% max seller contribution
10% – 24.99% down: 6% max seller contribution
Less than 10% down: 3% max seller contribution
On the other hand, government-backed FHA loans, perfect for those eyeing a home with cozier credit scores or financial credentials, cap seller concessions at 6%.
Meanwhile, for our veterans and service members, VA loans allow up to 4% of concessions, with some flexibility on where those funds go.
Crunching the Numbers
To get a ballpark of your closing costs, a simple calculation is to multiply your loan amount by that 3%-6% range. Let's say, hypothetically, your loan stands at $240,000:
$240,000 x 0.03 = $7,200
$240,000 x 0.06 = $14,400
So, you're potentially looking at a spread between $7,200 and $14,400.
A Snapshot of Closing Costs
Ready for a quick recap? Let's take a look at some common closing costs and who's usually picking up the tab. Buckle up, grab your favorite brew, and let’s break it down.
Type of Closing Costs
Buyer or Seller Responsible?
Varies depending on local rates
1-2% of loan amount
Buyer or Seller
3 months of expenses
Home Inspection Fee
$41/month for every $100,000 in value
Mortgage insurance premium (MIP) - FHA Loans
1.75% of loan amount (generally financed into the loan amount)
Depends on loan amount, interest rate, and closing date
Real Estate Commissions
Tax monitoring fee
varies depending on location
Varies depending on the homes purchase price
Buyer and Seller
Transfer tax fee
Varies depending on location
up to $1,500
VA Funding Fee
Varies depending on down payment and whether or not it is your first use (Generally financed into loan amount)
What do they all mean?
Appraisal: Here, a third-party appraiser jumps into the fray, evaluating the property to determine its market worth.
Attorney Fees: Some states beckon for an attorney at closing, ensuring all legalities are smoothly ironed out.
Closing Fee: This covers the tab for the escrow company or attorney guiding your closing meeting. Costs can spike if state laws mandate an attorney's presence.
Courier Fee: Sometimes essential documents related to your mortgage require safe transit, and this fee ensures just that.
Discount Points: Wish to shave off some interest from your mortgage? By purchasing points, you can. Each point equates to 1% of the loan amount.
Escrow Funds: These are funds held snugly by a neutral third party during the home purchase, ensuring all goes smoothly.
FHA Mortgage Insurance Premium: For those opting for an FHA loan, there's an upfront insurance fee, followed by consistent monthly premiums.
Homeowners Association Transfer Fee: This fee facilitates the switch of ownership records from seller to buyer, ensuring a smooth transition.
Homeowners Insurance: Insurance is vital, shielding your new abode from potential damages.
Origination Fee: This fee is the cost for the lender's behind-the-scenes work to process and validate your loan.
Lender’s and Owner’s Title Insurance: These insurance types protect the lender and you, respectively, from any unforeseen claims on the property.
Home Inspection Fees: This fee takes care of a thorough property check, highlighting any potential issues.
Prepaid Interest: Some lenders may want you to prepay the interest that accumulates from closing till your first mortgage payment.
Real Estate Commissions: A token for the real estate agents guiding you through the home buying journey.
Recording Fee: A small fee ensuring local land records are updated.
Survey Fee: This fee is for mapping out the property's dimensions and boundaries.
Tax Monitoring And Tax Status Research Fees: Ensuring you're not overcharged on property taxes, this fee covers the costs of such checks.
Title Search Fee: A necessary search to ensure no unforeseen claims exist on the property.
Transfer Tax: This tax ensures the home's title smoothly transitions to you, the new owner.
Underwriting Fees: The fee for the final scrutiny done by the lender's team before granting the mortgage.
FHA, VA, USDA Funding Fees: Opting for any of these loan types? There's a specific funding fee attached, varying based on the loan type and down payment.
Who Foots the Bill for Closing Costs? It's a common puzzle: who really bears the brunt of these costs? Generally, both the buyer and seller share this responsibility. However, the dynamics can shift based on the market pulse. In a buyer-centric market, you might find the seller more amenable to shouldering these costs, but in a seller's market, expect the tables to turn.
When Do I Settle These Costs? Closing costs live up to their name. They come into play on the property's closing day. To keep you informed, you'll receive a Closing Disclosure at least three days prior to the big day, detailing the exact costs you're up against.
Why Are Closing Costs a Must? In a nutshell, these costs cover a myriad of peripheral expenses the lender incurs during the loan process. Various external players, from appraisers and surveyors to home inspectors, play pivotal roles and need their dues settled. It's not an all-in-house affair for the lender.
Can I Claim a Tax Deduction on Closing Costs? While it's tempting to think so, the majority of closing costs don't qualify for tax deductions. However, there's a silver lining: points are deductible. Plus, if you've prepaid property taxes during the closing, they too can be claimed.
Who You Work With Matters!
Whether you're looking to buy, sell, or refinance your home, everyone's situation is unique, and having the right support can make all the difference. That's why I emphasize a personalized experience tailored to you and your specific needs. I also prioritize working with the best and most experienced local realtors. If you have any questions, want a personalized interest rate quote, or wish to connect with one of my trusted realtor partners, don't hesitate to contact me today!
The Wealth Captain
Mortgage Advisor | NMLS#2428833