What Are Closing Costs?
Closing costs are fees that you pay in order to finalize a home purchase. They can include mortgage-related fees, property title insurance, and taxes. Closing costs can vary depending on the price of the home, mortgage lender, and the state you live in.
According to Fire Cash Buyers, buyers typically can expect to pay between 2% and 5% of the total purchase price of their home in closing costs. For example, if you’re buying a $200,000 home, your closing costs could range from $4,000 to $10,000.
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While this may seem like a lot of money, it’s important to remember that closing costs are just one part of the overall cost of buying a home. When you’re budgeting for your new home, be sure to factor in closing costs so that you have a clear understanding of the total cost of ownership.
How Much Are Closing Costs for a First-Time Homebuyer?
One of the biggest challenges facing first-time homebuyers is coming up with the cash to cover closing costs. These costs can include everything from loan origination fees and appraisal fees to title insurance and escrow costs.
In some cases, they can even add up to several thousand dollars. Fortunately, there are a few ways to reduce the amount of money you’ll need to bring to the table.
For example, you may be able to negotiate with your mortgage broker to cover a portion of your closing costs. Additionally, your lender may offer programs that can help you with the cost of closing.
So, if you’re wondering how much closing costs are there for a first-time homebuyer, the answer is that it varies depending on a number of factors. But with a little bit of planning, you can minimize the impact on your wallet.
When Are Closing Costs Due?
Costs Before Closing Date
1. Earnest money
When you’re under contract to purchase a home, the buyer typically submits an earnest money deposit. This deposit shows the seller that you’re a committed buyer and helps to cover some of the costs associated with the transaction if you default on the contract. The amount of earnest money required is typically between 1% and 3% of the total purchase price, but may be more or less depending on market conditions.
2. Home inspection
A home inspector will check for any problems with the property that you are thinking of buying. The inspector will look at the roof, basement, plumbing, electrical system, and HVAC system. The inspection will cost about $300, but it is worth it to know if there are any major problems with the property before you close on the deal.
Costs at Closing
1. Credit report fees
Credit report fees are fees that lenders charge in order to pull a copy of your credit report. The credit report contains information about your credit history, including any late payments, collection accounts, or bankruptcies.
Credit report fees typically range from $30 to $50. In some cases, you may be able to have the fee waived if you agree to have the lender pull your credit report directly from the credit reporting agency.
2. Flood determination
One of the costs you’ll encounter at closing is the flood determination fee. Lenders are required by law to obtain proof that a property is not in a flood zone before extending a mortgage.
If your property is located in a high-risk flood area, you’ll need to purchase flood insurance. This fee is generally around $50-$100, but it can vary depending on the lender and the location of the property.
3. Homeowners association fees
HOA fees are monthly or annual charges that are paid to the organization that manages the property. These fees cover the costs of maintaining common areas, such as parks, pools, and playgrounds. HOA fees also cover trash removal and landscaping services.
4. Government taxes and fees
These can include things like property taxes, stamp duty (a tax on certain legal documents), and recording fees. You may also have to pay for a land survey or title insurance.
5. Private mortgage insurance:
Private mortgage insurance, or PMI, is a type of insurance that protects lenders from loss in the event that a borrower defaults on their home loan. PMI is typically required when a borrower makes a down payment of less than 20% of the purchase price of their home.
While PMI can be beneficial for borrowers by allowing them to obtain a mortgage with a smaller down payment, it also has some drawbacks. PMI premiums are typically paid on a monthly basis, and they can add hundreds of dollars to the monthly cost of your mortgage.
In addition, if you default on your mortgage loan, the lender will still be protected by your insurance policy, meaning that you will be responsible for any losses. As a result, it’s important to carefully consider whether PMI is right for you before taking out a mortgage.
6. Title search and insurance:
A title search helps to ensure that there are no legal claims or liens on the property, while title insurance protects you in case there are any problems with the title.
The average cost of these services can go up to around $1,000. While this may seem like a lot of money upfront, it’s worth it to know that your home is protected.
7. FHA mortgage insurance premium:
FHA mortgage insurance premium (MIP) is a type of insurance that homebuyers who use an FHA loan to purchase a home are required to pay. MIP protects the lender in the event that the borrower defaults on their loan.
Although MIP is required for all FHA loans, the amount of premium varies depending on the type of loan, the term of the loan, and the loan-to-value ratio (LTV).
For example, loans with a shorter term and/or a lower LTV will have a lower MIP. MIP is typically paid as part of the monthly mortgage payment and is usually rolled into the overall loan amount.
FHA loans are attractive to borrowers because they usually have lower interest rates and down payments than conventional loans. However, because of the added risk associated with these loans, lenders require borrowers to pay MIP.
8. Homeowners insurance
Homeowners insurance is a type of property insurance that covers a private dwelling and the belongings within it. The coverage extends to events such as fire, theft, and certain types of weather damage. It also provides liability protection in the event that someone is injured on the property.
A lender usually requires prepayment of the first year’s homeowners insurance premium at closing. This allows the lender to be sure that the home is insured from the outset, in case any damage occurs during the first year.
In most cases, the premium can be added to the mortgage, which means that it will be paid along with the monthly payment. Homeowners insurance is an important way to protect your investment in your home, and it is something that every homeowner should consider.
Why Are Typical Closing Costs Necessary?
Closing costs are necessary because they cover the expenses associated with buying a house. Without them, buyers would have to shoulder the entire cost of the transaction themselves. This would make buying a house much more expensive, and it would price out many people who otherwise could have afforded it.
Moreover, closing costs help to protect both buyers and sellers. For example, an inspection is an important part of the process because it can reveal any hidden problems with the property that the buyer might not be aware of. This protects the buyer from purchasing a home that needs expensive repairs.
Appraisals and legal fees also help to protect both parties by ensuring that the property is worth what the buyer is paying for it and that all of the paperwork is in order.
While closing costs may seem like an extra expense, they are actually an essential part of the home-buying process.
How to Reduce Closing Costs?
Closing costs can add up quickly, so it’s important to be aware of all the potential expenses before you start the home-buying process.
One way to reduce closing costs is to shop around for a mortgage lender. Each lender has its own fees, so it pays to compare rates and terms before you commit to a loan.
You can also try negotiating with the seller to see if they’re willing to cover some or all of the closing costs. In some cases, the real estate agent may be able to help with negotiations as well.
Another way to save on closing costs is to choose a less expensive home. A smaller home will have a lower appraisal and title insurance fees, and it may also come with a lower price tag overall.
If you’re flexible on your moving date, you may be able to take advantage of seasonal discounts as well. For example, many mortgage lenders offer lower rates in the winter months when demand is lower.