All About Closing Costs: How Much You Really Need to Buy a Home
- posted 2.11.2016
- Courtney Lynch
- Personal Finance
Buying your first home can be overwhelming. In the midst of saving for a down payment and searching for the property you've been dreaming of, you must also find the right lender and make sure you meet the long list of qualifications it will require before offering you a loan. It is easy to feel lost in the seemingly endless paperwork and fees that make up the homebuying process, and one thing you may forget about when saving up for a home are the closing costs.
Closing costs require a relatively large chunk of change. While there are ways to reduce these fees, it is key that homebuyers keep them in mind and consider which lender will provide them the best deal on closing costs. If you aren't quite sure what will comprise your closing costs or how to find a good deal, here is a complete guide:
What Are Closing Costs?
Closing costs are the final fees homebuyers pay before completing the purchase of their home. Most closing costs are paid to third parties that assist with the mortgage, as well as to the government for taxes. A small portion of the closing costs go to the lender. Zillow explained such costs include the appraisal fee, credit report, buyer's attorney fee, transfer taxes, lender's attorney fee, processing fee and more.1
In general closing fees total between 2 and 5 percent of the home's overall purchase price, Time explained. But it is extremely important to examine each closing cost closely and make sure you aren't paying too much.2
What You Should Expect
The Consumer Financial Protection Bureau introduced new forms in October to help homebuyers be better prepared for the closing costs that accompany the price of their new home. Now, said Time, lenders are required to provide a Good Faith Estimate of your closing costs within three days of when you submitted your loan application.
Zillow urged buyers to examine every single cost carefully and make sure there are no mistakes. If you think the lender is charging too much, now is the time to send out more applications and see if you can find a better offer. Additionally, lenders will sometimes take on some closing costs for you if you don't think you can afford them. Make sure you speak with your lender about all available options.
When you receive your final closing costs, make sure nothing is drastically different from the costs listed on the Good Faith Estimate, Time said. If anything stands out, speak up. According to Total Mortgage, your lender is required to cover the difference if the estimates were not within 10 percent of the final fees.5
Bankrate's annual closing costs survey found that closing costs declined by about 7.1 percent between 2014 and 2015.3 Average closing costs for 2015 were $1,847, down from $1,989 in 2014. For the survey, Bankrate created a hypothetical $200,000 mortgage on a single-family home for which the buyer had good credit and paid a 20 percent down payment. Then it requested Good Faith Estimates from up to 10 lenders in large cities in every state and Washington, D.C.
How to Save on Closing Costs
Realtor.com outlined a number of ways you can reduce your closing costs.4 Sometimes, for example, a seller is willing to pick up a large portion of the costs because it will encourage you to buy their home and is a tax-deductible expense for them. However, this is only likely when there is an excess of inventory in the area and sellers need an added incentive to entice buyers.
Another way to save is to close at the end of the month. For the remainder of the month in which you close, you will have to pay per diem interest. So, if you close at the end of the month, you will have far less interest to pay.
Some banks offer loyalty programs that reduce fees for members, and some lenders are willing to roll the closing costs into your loan. Be careful with this one, however: Time warned that combining closing costs with your loan could result in added expenses over time due to interest.
If you are in the military or a union member, you may also qualify for discounts. Make sure you do as much research as possible to figure out what you qualify for. Total Mortgage said there are also grants and programs designed to assist with closing costs depending on where you live and your occupation.
Where to Save on Closing Costs
Bankrate listed the states with the most expensive closing costs and those with the cheapest. If you are planning to live in Ohio, Idaho, Wyoming, Utah or Maine, then you're in luck. These five states have the cheapest closing costs, which range from $1,613 to $1,727.6 On the other hand, those looking to purchase a home in Hawaii, New Jersey, Connecticut, West Virginia or Arizona need to save up some extra cash.7 Closing costs in these five states range from $2,163 and $1,969.
When it comes to closing costs, make sure you do your homework. Ask questions and shop around for the best possible deal from the best possible lender. In addition, The San Diego Union-Tribune said to make sure the only upfront fee you pay is for your credit score.8 You should pay nothing else until all fees have been revealed.