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When buying a new house, many people consider the cost of the home but forget to think about the closing costs. To make sure you’re prepared as you go into the home-buying process, use this guide to understand what closing costs are, what is covered, and what you need to pay.

What Are Closing Costs?

The closing process is when the title of the property is passed from the previous owner to the buyer. It is at this time that homeowners pay the expected closing costs.

Closing costs refer to the various fees related to the home purchase along with the costs of working with a real estate professional. Every financial transaction is different, but most homeowners pay several different fees while closing. These include:

  • The application fee to your mortgage lender
  • The appraisal fee for the home
  • The cost of having your credit report checked before buying
  • Escrow deposits
  • Home inspection costs
  • Homeowners association transfer fees
  • Prepaid interest
  • Property tax
  • Underwriting fees
  • Various types of insurance related to the property and transfer of ownership

On their own, these costs might not be that much. The fee for the appraisal of your home might only be a few hundred dollars.

However, when you collect a dozen or more fees, you can spend several thousand dollars in closing costs before the home is officially yours. This means closing costs aren’t something you want to overlook.

How Can You Calculate Estimated Closing Costs?

The closing cost rule of thumb is that most homeowners will pay between two and five percent of the total value of the home. This means if you buy a $200,000 home, your closing costs will range between $4,000 and $10,000 once everything is signed and completed.

That being said, a $6,000 range doesn’t make it easy for homeowners to estimate their closing cost. Fortunately, there are multiple tools online that can help you estimate the closing costs on your home.

SmartAsset has a tool that you can use where you apply additional factors like your expected down payment and loan type. They will give you an idea for estimated closing costs and the total amount that you will be expected to pay at the settlement.

You can also ask your real estate agent for estimated closing costs for homes in your area. One of the benefits of working with a Realtor® is that they can guide you through this process.

They likely encounter closing costs on a regular basis and can provide a ballpark figure for what kind of closing expenses you will need to pay when you buy a home. During this time, you can also clarify their costs for working for you so you are better able to pay your agent when the time comes.

Why Are Closing Cost Factors Important?

Closing costs need to be part of your budgeting process. One of the biggest questions that home buyers ask is “how much house can I afford?

Most professionals recommend buying a house within your price range that also allows you to have additional expenses. They recommend spending less than 30% of your check on home payments. That’s because if you go over this and half of your paycheck goes toward your mortgage, then you won’t have extra funds for renovating, repairs, and other home needs.

Similarly, if you only take out a loan for the actual cost of your house, then you may feel overwhelmed and financially stressed when you need to pay the closing costs and other fees. Closing costs are part of financial planning and including them can make it easier to stay on budget.

How Can Homebuyers Avoid Closing Costs?

There are options out there to pay reduced or no closing costs during the homebuyer transaction.

You can ask about a no-closing cost mortgage where the closing costs are built into the mortgage or covered by the lender. While this may seem convenient, the lender often profits in the end. In exchange for a no-closing-cost mortgage, you may end up paying higher interest rates as they have to cover the no-closing-cost fees.

In the end, you will end up paying the amount you owe for closing costs; however, it is up to you whether you want to pay them separately or find a way to build them into your overall mortgage or loan.

Find a Realtor® to Help With the Buying Process

If this is your first time buying a home, then you might not understand all of the steps involved with transferring the title and becoming a homeowner. Fortunately, a good real estate agent can help. Find a Realtor® who understands your needs and who can help guide you through the buying process.

To find the best person to help you through the process of buying a house, check out Effective Agents. We use a data-driven algorithm to find you an agent who is a perfect fit for your needs so you don’t have to worry about closing costs or any other phase of the home buying process.

Find an Effective Agents Realtor® Today