Buying a new house can be a confusing process, especially if you’ve never done it before. When you buy something at the grocery store, the purchase is simple; you’ll understand exactly what you’re buying, exactly how much you’re going to pay for it, and there aren’t going to be any surprises.
But when you buy a house, the purchase price alone tells you very little about how much money you’ll need to actually complete the purchase. Chances are, you’ll be borrowing money from a lender and only providing a down payment as a substantial equity contribution.
On top of that, buyers are usually responsible for covering what’s known as “closing costs,” which are associated with closing the transaction on a property. But what exactly are closing costs? How much are they? And what else do you need to know to be an effective homebuyer?
The Basics: What Are Closing Costs?
Closing costs are any costs and fees associated with finalizing the transaction on a home, above and beyond your down payment. These closing costs cover a variety of different services and necessary actions, sometimes from multiple parties – but they’re usually conveniently aggregated and organized by the bank providing your loan.
These are just a few of the things usually included in closing costs:
- Lender fees. Your lender will charge money to compensate them for the effort required to put this loan together. Lender fees represent a large chunk of your total closing costs. There are many different types of fees you may pay here, including a property appraisal fee, a rate lock fee, prepaid daily interest charges, an origination fee, and fees related to PMI.
- Attorney fees. You may also have to pay for attorney fees, compensating real estate lawyers for their time in reviewing this deal.
- Title fees. Your bank or real estate agent may recommend a specific title agency, and you’ll need to pay title fees associated with that agency.
- Title insurance. You may also be required to get title insurance. Even if you don’t have title insurance, this is recommended by most real estate professionals.
- Taxes. You may be responsible for paying taxes on this transaction directly.
- Prepaid insurance. Your bank may require you to make an escrow deposit, prepaying for home insurance. Prepayments are not technically fees, as they are deposits, but because they influence how much capital you’ll need to close the deal, they’re typically included in closing costs.
- Prepaid property taxes. The same is true for property taxes.
- Prepaid HOA fees. If your house is in an HOA, you may also be responsible for paying a portion of your HOA fees upfront.
Note that real estate agent commissions are not included in this breakdown; these are usually handled separately (and sellers typically cover the commission). There are also costs associated with buying a house that are not included in closing costs, such as the cost of inspecting the home.
Who Pays for Closing Costs?
Generally, buyers are expected to pay for closing costs entirely. You may be able to negotiate with your seller to split closing costs – or even have the seller cover your closing costs. But it’s rare to have the seller take responsibility for closing costs, especially in a seller’s market. In a buyer’s market, you might have more luck.
How Much Are Closing Costs?
Generally, homebuyers can expect that closing costs will amount to between 2 and 4 percent of the purchase price of your home. For a typical home in a typical area, this can amount to $6,000 or more. However, it’s hard to reliably estimate “typical” closing costs because closing costs can vary based on a number of factors, including:
- Loan choices. Many of your closing costs are associated with your lender, so if you buy a home in cash, avoiding the lending process entirely, you can reduce the impact of closing costs.
- Negotiated responsibilities. Your portion of the closing costs may change, based on how you negotiate the deal.
- Lender policies. Some lenders may require more deposits or may charge more fees than others. Also, different lenders charge fees in different amounts and in different ways.
- Location. Closing costs will also vary based on your location. Cost of living, property taxes, and other variables will influence what you pay.
What’s the Difference Between Closing Costs and the Down Payment?
Closing costs are not your down payment. They do not contribute to your equity in the home. These are additional fees and deposits that function outside of your down payment.
How Do You Estimate Closing Costs?
Ballpark estimates and rules of thumb can help you plan for the cost of purchasing a home in the early stages of your decision. However, it’s important to realize that lenders are legally obligated to provide you with an estimate of closing costs well in advance of your finalized transaction. While estimates can change, most lenders will provide you with an accurate vision for your financial responsibilities and plenty of time to accommodate them.
Extra Tips for Managing Closing Costs
Here are some final tips for managing closing costs as a buyer:
- Remember additional costs associated with buying a home. There may be some additional costs associated with buying your home. For example, you may want to pay for an inspection or an appraisal. These exist beyond your down payment and closing costs.
- Be willing to negotiate. Most sellers won’t agree to cover your closing costs, but it’s often worth trying to negotiate. You may also be able to negotiate certain closing cost line items with your lender.
- Always overestimate. Always overestimate your closing costs so that you’re prepared for the worst. This way, you’ll avoid being caught off guard, and you’ll end up in a much better financial position.
- Consider shopping around. Sometimes, it pays to shop around for different service providers; for example, you may be able to find an alternative title agency that provides a cheaper rate than the one recommended by your bank. Your lender can let you know which closing costs are associated with services you can shop for and which ones are purely associated with the lender.
- Understand that estimates change. Don’t be surprised if your closing costs end up being slightly different than your estimate.
Closing costs can be confusing. So can many aspects of searching for and buying a home. That’s why it pays to work with an experienced real estate agent who can guide you through every stage of the process. If you’re ready to start looking for the Texas home of your dreams, contact us today!