Buying a piece of real estate is expensive. This is no secret. The property and structure of the new home come at great cost because they are also a great asset. The land on which the home sits will almost always appreciate in value over time. And the structure itself can also appreciate in value with the proper amount of maintenance, upkeep, and additions.
Budgeting for a home can seem straightforward — you get pre-approved for a loan of a certain amount, you have a certain amount of money in savings, and that adds up to what you can afford.
Well, not so fast. There are going to be additional fees associated with the homebuying process such as inspections. But the biggest additional fee homebuyers might not be aware of are the closing costs.
These additional fees can add up to thousands of dollars and that might not be so easy to account for if you are not prepared.
So what are closing costs? How can you estimate how much you might have to pay at closing? And what can you do to prepare for this?
What Are Closing Costs?
A mortgage is a complicated loan, and for good reason. This is likely to be the largest loan a person will apply for in their lifetime, so it’s in everyone’s best interest to make sure it’s done properly.
This includes protections for the lender, the buyer, and even the seller.
These additional fees are paid on top of the cost of the home and are due when the closing documents are finalized and signed.
Fees Relating to the Property
Home Inspection: This might be required by the lender, but is highly recommended either way. A professional will inspect every aspect of the property and home. A detailed report will be made available that lists any issues found during the inspection. This report can find issues that can convince a buyer to exit the deal if the repairs are too costly.
Appraisal Fee: A professional will assess the value of a property prior to the lender agreeing to offer the mortgage. The lender wants to be sure it can recoup the funds issued for the loan, and this will be much less likely if the home is worth far below the loan amount.
Title Search: This is performed to verify the person selling the property has the legal right to do so. It will also seek to find any other potential issues with the title such as liens, levies, and other encumbrances.
Title Insurance: This is often required by the lender. A “lender’s policy” will protect the financial institution from future title issues until the loan is paid off. An “owner’s policy” can also be attained to protect the buyer from any potential title issues found after the sale is finalized.
Fees Relating to the Loan
Application Fee: Processing a new loan takes a few various steps. Credit checks and administrative costs will be tallied and added to the closing costs.
Loan Origination Fee: This goes by a few different names — processing fee, underwriting fee, or administrative fee. But no matter what it’s called, it will cover the process of the lender preparing your mortgage loan documents.
Prepaid Interest: Interest will accrue between the closing date and the first mortgage payment. This is often due at the point of closing.
Attorney’s Fee: The services of a real estate attorney are highly recommended throughout this process. These fees will also be included in the closing costs.
Most people that provide less than 20% of the sale price of the new home will be required to purchase private mortgage insurance. This will be required on top of the standard mortgage insurance policy. The fees of both of these are often required to be paid upfront.
Estimating Closing Costs
Buyers can expect to pay somewhere between 2% to 5% of the total loan amount in closing costs. The amount of closing costs paid by the buyer can potentially be negotiated with the seller. These fees are often split between the two parties.
For example, a loan of $200,000 can expect to pay anywhere between $4,000 and $10,000 in closing costs.
The range of costs will depend on the specifics of your loan as well as the area in which you are buying a home. Discussing the potential fees with the lender will give you a better idea of where you will land in the possible range of closing fees.
Most buyers elect to pay the closing costs in one lump sum at the time of closing as opposed to seeking additional financing. This will require a little additional savings at the time of closing.
Plan for this by figuring out your potential range of closing fees. Unfortunately, many buyers will find themselves paying more in closing fees than they imagined. Account for this by simply assuming you’ll pay on the high end. The worst case scenario is that you save too much and have more money to spend on any potential fixes after moving into your new home.
Seek mortgage pre approval before you even begin shopping for a home. This will give you a concrete idea of what you can afford while also giving you a peek into what you can expect for closing costs. You will then have a target to shoot for so you can be prepared on closing day.
Set aside money each month to cover these closing costs. Take your time throughout the process to make sure you are prepared for the financial requirements, and also so you are comfortable with each decision along the way.