Buying a home can be a complex process, especially if you’re financing the purchase with a home mortgage loan. The purchasing process itself can be just as challenging as finding the right home, making an offer, performing home inspections, and getting appraisals.
When you secure your financing with a mortgage company, you’ll have to pay closing costs more often than not. These costs are a necessary part of the process, but what are they? This article explores just that and guides you in estimating what you might pay.
What Are Closing Costs?
Mortgage closing costs are fees that you have to pay to close on your home. These costs are above and beyond your down payment. These expenses include appraisals, property taxes, insurance and other fees. Here are some examples of fees that you might see included in closing costs:
- Loan origination fees: These are charged by the lender to process a new loan application and are usually between 0.5% and 1% of the loan amount.
- Appraisal fees: Home appraisals are performed to generate an accurate valuation for your property, which is essential for the lender, insurance and taxes.
- Title insurance costs: This protects the buyer and lender from defects with the title, such as back taxes and liens.
- Homeowners insurance: This protects the owner from damage to the property. The first year of homeowners insurance premiums is often included in closing costs.
- Property taxes: This is a tax based on the valuation of the property. Six months of taxes are often included in closing costs.
- Escrow fee: This fee goes to the closing agent.
- Private mortgage insurance: If your down payment is less than 20%, you may have to pay private mortgage insurance premiums that protect the lender in the case of default.
- Mortgage points: Discount points can help lower your mortgage interest rate and are often included in your closing costs.
How Much Will You Pay?
When you submit a loan application, lenders are required by law to provide you with a good faith estimate of the loan amount, which includes closing costs. Closing costs can be anywhere between 3% to 5% of the total purchase price.
The average closing costs for a home purchase in 2020 were $6,087 including taxes and $3,470 excluding taxes, according to ClosingCorp. Closing costs for a single-family residential property refinance last year were $3,398 including taxes and $2,287 excluding taxes.
Sometimes you can negotiate for the seller to pay closing costs. However, some mortgage brokers will let you roll them into the loan if you have to pay them yourself. Check with your mortgage broker to find out.
Advice for Homebuyers
Buying a home can be an exciting venture, and it’s easy to overlook common home-buying mistakes that can lead to unexpected and unnecessary out-of-pocket expenses. Examples include not paying attention to your credit score, not using a buyer’s agent and more. Check out GOBankingRates’ guide to avoiding 17 common home-buying mistakes that can hurt your wallet.
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