When buying your home, there are more financial decisions you need to be concerned about besides simply a down payment. When you purchase a home, one of the least understood expenses is closing costs. Today, we will look at what they are and if you should be concerned about them.
What are Closing Costs?
Closing costs are simply fees associated with the purchase of a home. These fees go to several different parties including your mortgage lender, and companies to appraise and inspect your home. Some of these are required, such as those going to your mortgage lender, and some may be voluntarily depending on circumstances like inspection or appraisals.
Who pays Closing Costs?
Most closing costs are paid by the buyer of the home, but some are paid by the seller. Sometimes as part of the contract made by the buyer, there could be negotiations asking for the seller to cover additional closing costs.
How much are Closing Costs?
Generally speaking, closing costs range between 2% to 5% of the purchase price of the home. So if you were to purchase a home for $200,000 the closing costs would range from $4,000 to $10,000.
Some people lump agent commission into closing costs which would affect the seller of the home. These commissions could be upwards of 10% of the sale price of the home.
When are closing costs paid?
Closing costs are often due the day the property closes, or when the house is legally transferred from seller to buyer.
As mentioned above, some of the closing costs are paid to companies who are doing work on the house during the sale process, such as the appraisal and inspection. These fees would be paid at the time the service is performed but would still work into the overall percentage listed above.
Do cash purchases still have these costs?
Cash buyers still have many of the same fees that a person who will finance a mortgage would have. However, they would be able to avoid any fees associated with a mortgage such as the payment to a mortgage lender.
How do I estimate my Closing Costs?
There are two basic ways you can estimate how much your closing costs may be on a future purchase.
You can simply multiply the overall cost of the homes in your price range by 2% and work incrementally up to 5% to get the range of potential costs.
A second way is to use an online calculator like Zillow has. These take a lot of the math out and are often simpler.
How to avoid Closing Costs?
You cannot completely get away from these costs, but there are some ways to minimize how many you may have.
Shop around for low fee lenders
Just as interest rates can change with different mortgage lenders, so do fees. Because lenders are doing the work themselves for their fees, they may be flexible and willing to negotiate. Asking for a breakdown of their origination fees and comparing that to other lenders is a good place to start.
Ask the seller to pay some fees
As mentioned above, sometime in negotiating a sale, the buyer can get the seller so cover some of the fees.
Apply for a first-time buying assistance program
Homes are expensive and for many people, there are numerous assistance programs available to help with their first home purchase.
Use a no closing cost loan
Using this option does not erase your closing costs, but instead places them somewhere else. Rather than paying the costs upfront, they are folded into your total loan amount. Understand, this will change the amount of your total loan and may affect your interest rate.

Hopefully this article has taken some of the mystery out of closing costs allowing you to make a more informed decision when you get a mortgage.

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