Investing in real estate can be a great way to build wealth. Still, it’s essential to understand the average closing costs associated with a home purchase.
Closing costs – sometimes known as escrow fees – are charged by the lender, title company, real estate agent, and other parties involved in the transaction. They are typically due and payable at the close of escrow and can add several thousand dollars to the purchase price, so it’s important to know what you’re paying for and how to negotiate the best deal.
For home buyers, it’s vital to factor closing costs into your budget, so you’re aware of unexpected expenses. And for home sellers, understanding what closing costs your buyer may be responsible for can help you negotiate a higher sales price.
This article will examine some of the most common closing costs associated with real estate transactions and a mortgage loan refinance.
Real Estate Closing Fees
When buying a new home or a resale house, one of the expenses you will encounter is closing costs. Closing costs are the fees lenders charge for creating your loan and cover items such as home appraisal, home inspection, title searches, appraisal fees, inspection fees, transfer taxes, and homeowners insurance. The price of closing costs varies depending on the loan type you take and where you live.
Certain states require you to have an attorney before closing on a housing loan, which means you will have to pay attorney fees. Real estate attorneys handle the coordination of your closing and the paperwork for transferring your title. Fees for attorney charges differ based on the state you live in and the local rates.
Not only do you have to pay the agreed-upon price for the property, but you are also responsible for footing the bill for closing costs. These expenses can cover real estate commissions, taxes, title filings, and more. These fees are paid to the escrow company or the attorney who handles your closing.
Your lender may charge an upfront loan application fee for processing your mortgage application. While the fees vary, they can cost you up to $500 and are usually nonrefundable, even if you get rejected for a loan. For this reason, it is important to ensure that you have good credit and enough funds before filling out the mortgage application.
Credit Report Fee
During closing, you may need to pay your lender to run your credit report and confirm your credit score (unless the lender offers to cover this cost). Buyers with a better credit score may qualify for a larger mortgage and a lower interest rate. In contrast, people with dings on their credit reports may pay a higher interest rate.
Depending on what your score is, your loan and interest rates may increase. The one-time cost for credit report fees can cost $20 or more, but the report is usually only needed once. It is important to note that creditors usually make one hard credit inquiry which can affect your score.
Homeowners Association Fee
If you live in an area that has homeowners association fees (HOA), there will be a cost to transfer the HOA fees from the seller to the homebuyer. The reason for this fee is to validate that the seller is current with their HOA dues and to give you a copy of the HOA’s payment schedule. How much you will pay, if at all, is determined by your HOA’s policy, although the seller usually handles this cost.
Certain states require a land survey on the property before the sale is complete. This fee gets paid to the survey company, which will confirm your property lines. Unless the property you buy has a lot of land or difficult boundary lines, the price for a survey fee runs about $300-$1,000.
Lender Closing Costs
Lender closing costs include all services that your lender provides, such as the loan origination fees, underwriting your application, and logging your mortgage with the government. However, some lenders may have different policies regarding the fees charged and the cost, so it’s important to check with the financial institution providing you with the loan. These fees can cost about 1-2% of the loan amount.
An underwriting fee is a fee that home loan borrowers are charged by their lender to have their loan application reviewed and approved. This fee is typically a percentage of the total loan amount and can vary depending on the lender and the type of loan being applied for.
Discount points are an optional prepaid upfront payment you can make to the lender. This will reduce your monthly payments by reducing your loan’s interest rate. However, depending on prevailing rates, discount points costing up to 1% of the loan amount or more might not be worth the price.
Private Mortgage Insurance
Your mortgage lender may require you to purchase private mortgage insurance (PMI) if your down payment is less than 20 percent of what you paid for your house. This mortgage insurance premium protects the lender if you default on your mortgage.
Securing a title means you have permission to own and use the property and usually pay title fees at closing. The costs for a title fee go to the title company so that they can run a title search to see if any issues may be related to the title. Once the search has been done, the title company can review, make changes, and confirm the results.
Running a title search confirms that the seller of the home you are buying from is the legal owner. This is important because the title search can turn up any claims or liens that the current homeowner is unaware of. The fee for this search varies between $75-$200 depending on the property’s location. The current owner usually pays for it as a part of their selling costs.
Owner’s Title Insurance
The owner’s title insurance policy is to financially protect the new property owner from any legal claims or liens that may appear on the home’s title. If you have any problems with the title, such as unpaid taxes or debt, your insurance will cover you. While sometimes the seller will purchase this insurance for you as an incentive, usually you will need to buy it yourself as the buyer.
Lender’s Title Insurance
The buyer usually obtains the lender’s title insurance when a home is purchased. This policy protects the lender against any claims or losses that might arise from property title problems. The borrower typically pays the lender’s title insurance premium at the closing. Sometimes, the seller may pay for all or part of the premium.
Recording fees are part of the closing costs associated with transferring ownership of your property. The fee is set by the county where the property resides and document size/complexity. Depending on your county’s guidelines, you could spend anywhere from $125 to a few hundred dollars.
You need certain documents to be recorded for some real estate transactions, resulting in a recording fee. You must get a sale record from your local agency; not doing so could result in legal problems concerning your ownership. The following are examples of such documents:
- Lien claims
- Changes of title
- Bills of sale
You will pay escrow fees when you buy a home as part of your closing costs. Escrow is where a non-biased third party handles the funds and distributes them accordingly. Escrow fees handle the paperwork and distribution of funds that come with closing on a home.
Generally, the homebuyer and seller will discuss who pays escrow fees. However, the easiest way is to split the fees evenly. You will pay an escrow company directly unless you use a real estate attorney to assist in the closing.
Enlisting the professional help of a real estate attorney can help make the escrow period smooth. The amount of time between the contract signing and the closing is known as the escrow period and can last between 30-60 days up until the closing date. A real estate attorney is extremely beneficial during complex situations such as a discrepancy over the contract terms or issues with transferring money.
While the cost for attorney fees varies depending on location, they can generally run $2,000-$3,000 per transaction. If the deal has many moving parts, you can expect the attorney fees to be on the higher side. If you plan on hiring an attorney to handle your transaction, clearly explain what is involved and ask what their rates are so that you have an accurate estimate.
Real Estate Agent Commission
At the property’s closing, your real estate attorney (or escrow officer) will read their closing statements and distribute payment, including the real estate agent’s commission. A real estate agent’s commission costs approximately 5%-6% of the property’s selling price. The realtor for the buyer and the seller will usually split the commission evenly.
Property taxes are another form of escrow fee which homebuyers can expect to pay. Your local government determines the property tax rate. It then uses the money to pay for neighborhood funds such as repairing roads, schools, and the fire department.
If a lender requires it, a borrower can open an escrow account to hold payments for property taxes. The account is set up through the mortgage servicer/provider. They will then give you an approximation of next year’s property taxes and divide the payments into 12 individual amounts, adding them to the monthly mortgage payment.
How to Negotiate the Best Deal on Closing Costs
The best way for a buyer to negotiate the best deal on closing costs is to be prepared ahead of time. The buyer should know what fees they are responsible for and what their lender is willing to cover.
The buyer should also be aware of any concessions the seller may be willing to make. For example, the seller may agree to pay a portion of the buyer’s closing costs as part of the home sale purchase agreement.
The best way for a buyer to negotiate with their lender is to compare rates and fees from multiple lenders. The buyer should also ask about any discounts or rebates the lender may offer and review the closing disclosure before agreeing to the loan.
Buyers and sellers can use these tips to negotiate the best deal on closing costs. By being prepared and researching, buyers can save money on this crucial aspect of purchasing a home.
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