What Are Closing Costs?
Closing costs, sometimes called settlement fees, are associated with your home purchase and are paid at the closing of a real estate transaction. These costs are separate from your down payment. While your down payment reduces the amount you are borrowing, closing costs are fees associated with obtaining a home loan. Both buyers and sellers may face closing costs, but buyers usually bear the brunt of these fees.
The costs will vary depending on state, county, and municipal laws. However, you can typically expect to pay the following fees when you close on your home:
Common Closing Costs
- Government Recording Costs
- Appraisal Fees
- Credit Report Fees
- Lender Origination Fees
- Title Services (insurance, search fees)
- Tax Service Fees
- Underwriting Fees
How Much Does It Cost to Close?
Unless your seller is paying closing costs or your lender is offering lender credit options, you should be prepared to pay between 2% and 3% of your purchase price in closing costs. For example, if you agreed to pay $300,000 for your home, you should set aside $6,000 to $9,000 to cover the closing costs. With a low down payment program, your closing costs could even equal the amount you saved for your down payment. Yikes!
How to Find Out What Is Included in Your Closing Costs
Your lender should provide you with a fee worksheet showing a breakdown of estimated closing costs at your pre-approval appointment. It’s important to know not only the estimated interest rate offered but also the closing fees you’ll need to pay in addition to your down payment.
At mortgage companies like DC Lending, there are options for various interest rates that come with different lender credits. These credits can help reduce or eliminate your closing costs.
Common Misconception
It’s a common misconception that an interest rate with a lender credit is always higher than with another lender. Mortgage pricing can vary significantly between lenders. This is why it’s crucial to shop around to ensure you’re getting the best terms for you. Your Loan Officer can help you review your financial goals, the duration of your loan, and available funds, offering recommendations on rate options and lender credits.
After you’ve found a home and signed a purchase contract, your lender is required to provide you with a Loan Estimate detailing all loan terms, including the closing costs you’ll be responsible for, within 3 days of receiving your contract. Be sure to read this disclosure carefully and ask your Loan Officer any questions.
Additionally, a Closing Disclosure must be provided three days before the settlement or closing. This document should be reviewed thoroughly with your Loan Officer.
How to Get Closing Costs Reduced or Eliminated
1. Utilize Lender Credit
Lender credits can be a great option if you’re short on cash or plan to stay in your home for a shorter period. For short-term homeowners, lower rates may not always be the best option if they require higher closing costs that you won’t recover in a lower payment.
2. Ask the Seller to Contribute
Depending on the market and the home, the seller might be willing to contribute to your closing costs. This is something your Real Estate Agent can negotiate on your behalf.
3. Shop Around
Mortgage pricing varies widely between lenders. While most buyers choose their bank, a bank doesn’t always offer the best pricing. Consider getting a second opinion or price quote from a locally owned mortgage company.
4. Ask About Lender Credits
Some lenders, like us, offer lender credits that can reduce or eliminate your closing costs. Be sure to ask how we can pass these credits on to you for significant savings.
Bottom Line
Understanding closing costs early in the process, obtaining multiple quotes, and asking plenty of questions will help you determine how much you’ll be responsible for at closing. Be prepared to pay the fees, but work closely with your lender to find ways to reduce the amount.