Many home buyers get caught up crunching the numbers of the down payment and interest rates. After all, those are the costs that most of us are warned about right from the jump. But home closing costs are a critical part of the home purchase — the name alone is enough of an indicator. If you don’t finish closing, you don’t get to own the home.
But what are home closing costs? What do they do, who is receiving them, and what should you expect from home closing costs?
This article contains everything you need to know about what to expect from home closing costs.
What are home closing costs?
Home closing costs are the fees a buyer pays the lender for processing their mortgage. The closing costs depend on the type of loan and will cover tasks like the home appraisal and home title searches on the property (the latter is only applicable if the buyer is purchasing a resale home). Other home closing costs include the appraisal fee, credit report charge, and loan origination fees.
Transaction-related closing costs include attorney’s fees, escrow agent charges or settlement fees, and property survey fees. In addition, government charges such as recording fees and transfer taxes are usually also grouped with transaction-related closing costs.
Closing costs when buying a new construction home
There are many advantages when buying a new build versus a resale home, and saving on closing costs should be included in that category.
Many builders will pay some or all the buyer’s closing costs if they buy a home from the builder and get a mortgage from the builder’s chosen lender. Here’s an example of a closing costs promotion from Richmond American.
If your builder gives you a percentage-based closing cost bonus, ask where that amount will be applied to the purchase. It could be the home’s base price, the total sale price, or the amount of your loan. These will all be different amounts and can significantly vary, so make sure to find out.
Most of the time, the builder’s reward is given as a credit at closing. That means you won’t have to pay your closing costs out of your pocket and wait for a return. Instead, the amount will be added to your purchase right away.
How much should a buyer anticipate spending on home closing costs?
Even before the buyer receives the loan estimate from the lender, they will get a rough sense of how much to budget for closing costs because they usually range from three to five percent of the purchase price of a home. This percentage range is for new construction and resale homes. How much a buyer needs for closing depends on a few factors, including the type of loan, the down payment size, and where the property is located.
As the price of homes increases, so do the closing costs. CoreLogic reported that the average closing costs increased by $818, including taxes, in 2021 — the most recent data to date. The national average mortgage closing costs for a single-family property were $6,905, including transfer taxes, and $3,860, excluding transfer taxes. These amounts represent a 13.4% and 11.2% year-over-year increase, respectively.
How should a buyer pay for home closing costs?
Several options are available to the buyer responsible for paying the mortgage closing expenses.
• Put down cold hard cash at the closing. This may be the most cost-effective choice if you can spare the funds now and intend to keep your loan for a long time.
• Inquire if the lender will cover your closing fees. You may get your lender to pay all your closing fees if you agree to pay a higher interest rate. This choice could be ideal if you don’t have much spare money and don’t want to keep your loan for long. Paying a slightly higher interest rate for a few years may be more cost-effective.
• Include the costs of the closing in your mortgage. Closing fees can be added to the loan principle rather than paid out of pocket or at a higher interest rate, allowing you to finance a larger amount. However, the additional amount you finance will increase your monthly payment and interest due. This may be impossible if you ask for an amount near the maximum a lender is willing to grant you.
• Try having the seller cover all your closing expenses. The seller may pay some or all your closing expenses if you’re purchasing rather than refinancing. If the seller is responsible for them, it is known as a “seller concession” or “seller credit.” You may have to pay more for the home. Therefore, in a seller’s market, asking the seller to cover some or all your closing costs may be a viable option. You have more leverage in a seller’s market if you’re a buyer.
Consider your situation and your finances
Now that you know what to expect from home closing costs, it’s best to consider your situation. If you’re buying a new home, inquire about assistance with closing costs. Using your builder’s preferred lender could save a significant amount of money.
If you’re going the resale route, weigh your options on the best way to pay. Optimally, a buyer should try to pay upfront, but that might not be the easiest option. Talk with your lender about your options. Once you’ve made a decision, you can finally concentrate on the happiness of being a homeowner.
