A common question I often hear from homebuyers is this: How much closing costs will I need to pay?
First of all, good question. A smart homebuyer asks questions to fully understand the process and their financial and legal obligations. But while many people have purchased a home – or multiple homes – few can actually detail what they paid in closing costs (without digging out paperwork.)
Here are the basics. Every mortgage loan has closing costs. They can be paid by the borrower, the lender or a combination. Sometimes, the seller even agrees to pay a portion of the closing costs.
If the mortgage lender pays the closing costs, the borrower will pay a higher interest rate. The rate will depend on the specifics of the particular buyer’s transaction.
As a general rule, closing costs average about 2-3 percent of the purchase price of the home – about $4,000 on a $200,000 home, but may be as high as 5 percent, depending on loan type and required appraisals and inspections.
These costs should not come as a surprise, as each borrower is provided with a Loan Estimate from the lender within three days of the mortgage application. This is a good “snapshot” of the costs you can expect. You will also receive (3 business days prior to closing) an initial Closing Disclosure to review and sign, which will detail your closing costs and may vary from the Loan Estimate. As a smart consumer, you should always question any numbers that are different and ask your Realtor® or Mortgage Consultant to explain why.
Closing costs are a bit of a misnomer, as some of these costs are actually paid before you get to closing, or as they say, “outside of closing.” Here’s a partial list of costs to expect:
Paid outside of closing
• Credit check
• Property Survey
Paid at closing
• Lender Fees
• Title Search Fees
• Lender’s Title Insurance
• Recording Fees for the Deed
• Property Transfer Taxes if applicable
• Property Taxes and Insurance – usually 2-3 months
• Points if applicable
• Attorney Fees
It’s important to remember that a mortgage is a highly personalized transaction. So what was true for your friend, sister, or co-worker may not apply to your situation or the property you are buying.
That said, I’ll leave you with a few closing thoughts of fairly universal advice.
• If you don’t understand a cost, ask. You should be comfortable with all mortgage-related costs.
• Be aware that you will pay a slightly higher interest rate to have closing costs included in your loan.
• Discount points are an option to reduce your interest rate and may be a good option if you are planning to stay in your home for 7 years or more.
• Your interest rate is not everything. Your lender should explain your total rate (APR) and fees package. Allen Tate Mortgage offers a free Best Rate Guarantee to ensure you are receiving the best total loan package.
• Your type of loan will determine the down payment that must be paid at closing, as well as any applicable fees. This is especially true for FHA, VA and USDA loans. Your Mortgage Consultant can detail these costs.
• Lock in your mortgage rate for the appropriate time frame. Longer rate locks cost more, but extending a rate lock costs more than locking in the rate for a longer time in the first place.
Allen Tate Mortgage NMLS#1433719
Loans available in NC/SC
Lisa Green, Vice President Loan Origination, Allen Tate Mortgage