As the name implies, the closing costs are added up just as you finalize your mortgage and are about to take over the title. Most are paid by the buyer, but the seller can also hang for a few.
Even if you take advantage of historically low interest rates, closing costs can be significant and worth including in your home buying budget. Here’s what you need to know to avoid last-minute surprises.
What are the costs of a mortgage?
Closing costs refer to the upfront fees charged to obtain a loan and transfer ownership of a property, according to the Consumer Financial Protection Bureau. Sometimes they are referred to as settlement costs.
They handle a lot of behind-the-scenes transactions and paperwork. The brokers, bank, title company, appraisers, and attorneys for document preparation are all payable. Some common closing costs include title insurance, government taxes, appraisal fees, tax service provider fees, and prepaid expenses, according to a list published by the Consumer Financial Protection Bureau.
The buyer usually pays most of these costs, but the standard arrangements vary from country to country and deal to deal. Sometimes a buyer can negotiate to have the seller pay a portion of the closing costs in exchange for a higher overall selling price. Buyers can also have a lender for the closing costs. But again, that can result in a higher loan amount or a higher interest rate.
What do closing costs pay for?
Your closing costs will depend on your particular transaction and can be affected by interest rates, local insurance costs, tax rates, local appraisal costs and other factors. But here’s a general breakdown of some of the overheads covered by closing costs:
Title insurance: This protects lenders from financial losses due to title issues, such as liens or conflicts of ownership.
Government taxes: These can include the property tax on the home, local government fees – such as one for registering the sale of the property – and a tax for transferring the title from the seller to the buyer.
Appraisal costsThese are charged by an appraiser for coming to the property and assessing the property’s value to determine an appropriate loan amount.
Tax service provider fees: These help pay for third parties to track property tax payments and other tax audit duties.
Costs paid up front: These include things like homeowners insurance, property taxes, and interest until the first payment is due.
How much are the closing costs?
Most lenders and industry viewers will tell you that your closing costs will cost you, on average, between 2% and 5% of the loan amount.
The national average closing costs for a single-family home were $ 5,749 including tax and $ 3,339 excluding tax in 2019, according to ClosingCorp, which analyzes closing cost data for the industry.
For a more specific estimate, we used a closing fee calculator from banking service BBVA to show what these fees might look like for a $ 250,000 loan. After entering a 20% down payment, 30 years for the term, and an interest rate of 4%, the total amount of closing costs was calculated at $ 7,042.
What are closing documents?
One of the most important documents you will receive prior to final signing is the closing disclosure, which details the details about your loan, including your closing costs. The lender must provide you with that document three business days prior to the scheduled loan closing.
It is very important to read this document to ensure that all information is correct and that the terms of the loan are accurate and clear. This explanation of the closing disclosure can help you review the document. Among other things, it states to ensure that the closing costs match the most recent estimate of the loan.
Other important closing documents are:
Confession of guilt: a legal document stating that you are repaying your mortgage.
Mortgage, security instrument or trust deed: Gives the lender the right to take away your property if you fail to pay your mortgage on the terms you have accepted.
First Statement of Escrow Disclosure: Displays the charges you pay on a security deposit each month.
Right to cancel the form: Outlines the rules for when and how to cancel your loan, usually used as part of the refinancing process.
If you have any questions about this, ask your lender, broker, or attorney for help.
Are closing costs tax deductible?
The IRS says the only closing costs you can deduct are the points you pay to lower your mortgage interest rate and real estate taxes that you have to pay up front. If you specify, you can deduct these costs during the year that you buy your home.
The IRS also has a list of closing costs you can add to the foundation of your home. They include things like legal and registration fees and surveys.
Tax rules are constantly changing, so we recommend that you speak to a tax professional about what you can and cannot deduct from the closure of your home.
Tips and tricks to save on closing costs
Saving all your money for the down payment is a home buying mistake to avoid. Closing costs are extra thousands of dollars on top of the down payment that you may not have expected.
But there are ways to save.
“In the seller market, we have offered to refund borrowers their appraisal fees, we have a network of title companies that lower ownership rights and offer grant programs for eligible borrowers to cover the down payment and some closing costs,” said Steve Twyman, branch. manager with mortgage experts “There are options for lenders too.”
This, of course, is where having strong credit pays off, Twyman adds.
Orlando Miner, a director at Miner Capital Funding, LLC, recommends seeing if you can charge the seller for the closing costs. “This is common, so don’t be shy about asking for it. Remember the worst that can happen is they can say ‘no’.”
But again, this will be more difficult to negotiate if it is a seller’s market, as it is now in many regions of the US.
Miner adds that timing is key. For example, if you close at the end of the month, you save on prepaid interest. “The rule is that you have to pay prepaid interest from the date you approach the end of that month. So the closer you get to the end of the month, the less money you pay.”
You may also want to play around with closing cost calculators. These can show you at least roughly how much you might pay for closing costs as a flat fee.