Buying a home is an exciting milestone, but it's essential to understand the full scope of expenses involved, including closing costs. These costs can catch some buyers off guard if they're not adequately prepared. In this guide, we'll break down the various closing costs associated with purchasing a home and provide tips on what buyers should know and look out for when buying a home.
Understanding Closing Costs:
Closing costs encompass a variety of fees and expenses incurred during the final stages of a real estate transaction. While specific costs can vary based on factors like location and the terms of the purchase agreement, common closing costs typically include:
Loan Origination Fees:Â Charged by lenders for processing a mortgage application, origination fees typically amount to around 0.5% to 1% of the total loan amount.
Appraisal Fees:Â Lenders often require an appraisal to assess the property's value, ensuring it meets or exceeds the loan amount. Appraisal fees typically range from $700 to $900. This fee is taken out before closing, and you must pay it before the appraiser goes out to appraise the property. This is not included in your lender fees and will come out of your pocket directly.
Lender’s Title Insurance: Title insurance protects the buyer and lender against any legal disputes over the property's ownership. Costs vary but generally fall between $600 to $2,000 depending on the home's purchase price.
Home Inspection: While not always required, a home inspection is highly recommended to uncover any potential issues with the property. Inspection costs vary based on location and the size of the home but typically range from $500 to $800. If the inspector finds serious issues with the home, they may recommend more specialized inspections by various professionals which will add to the cost of inspections – a mold specialist for example. This fee also comes out of your pocket and you pay the inspector directly - this does not show up on your loan statement.
Well Inspection:Â In addition to a standard home inspection, buyers purchasing properties with private wells should consider scheduling a well inspection. A well inspection evaluates the condition and functionality of the well, ensuring the quality and safety of the property's water supply. During a well inspection, a qualified professional will assess various aspects of the well, including its depth, casing integrity, pump operation, and water quality. They may conduct tests to check for contaminants such as bacteria, nitrates, and other harmful substances. While not always required, a well inspection provides invaluable insights into the property's water system, helping buyers make informed decisions about their investment. Costs for a well inspection typically range from $400 to $600, depending on factors such as location and the complexity of the well system. When budgeting for closing costs, buyers should factor in the expense of a well inspection if the property relies on a private well for water supply. Investing in a thorough assessment can potentially save buyers from costly repairs or health hazards down the line, making it a worthwhile expense in the homebuying process.
Escrow Fees:Â Escrow accounts hold funds during the closing process and ensure that both parties fulfill their obligations. Escrow fees are typically split between the buyer and seller and can range from $500-$800 per side. Escrow fees are also added on to your final bill statement, or the amount that is due for "cash to close", and is not part of your lender fees or "lender closing costs".
Recording Fees:Â Charged by the local government to record the deed and other documents related to the property transfer, recording fees typically range from $500 to $800.
Real Estate Agent Fees:Â Buyers who have agents representing them typically have a buyer-broker agreement signed where it is outlined how much commission a buyer broker is charging. This commission is typically covered by the seller. However, if there is a difference in the commission amount that the seller is offering and the amount agreed upon in the buyer-broker agreement, the buyer may be responsible for the difference amount. In some cases, if the seller is not offering any buyer broker commission, the buyer's agent fee might be negotiated into the sale price or terms of the sale, but not always. It is crucial for buyers to understand the terms in their buyer-broker agreements fully before signing.
Tips for Homebuyers:
Budget for Closing Costs:Â In addition to saving for a down payment, prospective buyers should budget for closing costs, which can amount to 2% to 5% of the home's purchase price.
Request a Loan Estimate:Â Upon applying for a mortgage, lenders are required to provide a Loan Estimate outlining the expected closing costs. Review this document carefully to understand what fees to anticipate.
Negotiate with the Seller:Â In some cases, buyers may be able to negotiate with the seller to cover a portion of the closing costs, alleviating some of the financial burden.
Shop Around for Services:Â Don't hesitate to shop around for services such as title insurance, appraisal, and home inspection to find competitive rates and potentially lower closing costs.
Understand Closing Disclosures:Â Before the closing date, buyers will receive a Closing Disclosure outlining the final terms and costs of the loan. Take the time to review this document thoroughly and ask questions about any unfamiliar fees.
Conclusion:
Closing costs are an unavoidable aspect of buying a home for homebuyers, but with careful planning and understanding, buyers can navigate this process with confidence. By familiarizing yourself with the various closing costs associated with real estate transactions and implementing the tips outlined in this guide, you'll be better equipped to manage expenses and ensure a smooth closing process. Remember, knowledge is key when it comes to closing costs in real estate, so arm yourself with information and approach the homebuying journey with clarity and confidence.
