Closing Cost Guide for New Home Buyers
If you're thinking about buying a home, one of the things that you should be aware of are the closing costs. If you haven't properly budgeted for the closing costs, or if you're not clear on what the closing costs are, you could have trouble buying a house. Knowing about closing costs, how much you can expect to pay and when they're due can help you decide if you can afford to buy a home soon.
What Are Closing Costs?
Closing costs are the fees and payments that come due when a home transfers ownership from one person to another. Closing costs are collected by the escrow company and then distributed to the people and entities that are owed money.
Are Closing Costs and the Down Payment the Same Thing?
Closing costs and the down payment are not the same. The down payment is the amount of money the home buyer puts toward the price of the home when getting a mortgage. The down payment is usually between 3.5% and 20% of the price of the home. Most mortgage lenders require the home buyer to put down some kind of down payment, although the amount may vary depending on the type of loan.
The closing costs are made up of many small fees. Altogether, the closing costs come to an amount between 2 and 5% of the price of the home. However, this amount may vary, depending on the state where the house is being purchased and the circumstances of the home purchase.
When are Closing Costs Due?
Closing costs are due when escrow closes. This is the day the house transfers ownership from the seller to the buyer. This date usually comes around 30 days after the initial contract for the home purchase is signed by both parties.
What Do Closing Costs Entail?
The closing costs for a home purchase consist of many, many smaller fees lumped together into one big payment. Below are just some examples of typical fees included in closing costs:
- Appraisal. This fee is paid to the appraisal company that provides the lender with the appraisal.
- Credit report. The mortgage lender pulls a credit report to set the interest rate for the loan, and then charges the home buyer for the report.
- Homeowner's insurance. Usually the home buyer pays for the first year of the insurance premium up front.
- Points. Points are extra money the home buyer elects to pay to reduce the monthly payments over the life of the mortgage.
- Origination fee, application fee and underwriting fee. These fees are paid to the lender to cover various costs associated with the loan.
- Recording fee. This is a fee paid to the local government office for recording the public land transfer.
- Transfer taxes. This tax is paid to the local government offices for the transfer of the property to the new owner.
Can You Reduce Your Closing Costs?
There are a number of ways a home buyer can try to reduce closing costs when purchasing a new home. Negotiating with the lender is possible, as you work to get the best interest rate on your mortgage loan. If you are paying points to reduce the mortgage amount, you can consider paying fewer points in order to decrease your closing costs. Work on your credit score to get your interest rate as low as possible.
Discuss the closing costs with your real estate agent, as there are times when a seller is willing to take on some closing costs in order for the sale of the home to go through. It can help lower your closing costs when the loan goes through at the end of the month, or you can try to negotiate the fees with your lender.
Work With Your Real Estate Professional
If you're a Round Rock home buyer who would like to purchase a home, start by learning everything you can about the home buying process. To do this, you should work with a real estate professional. A good real estate agent can answer any questions you have and can also give you information about the other aspects of buying a home. Having a good real estate agent on your side will make the process easier overall.