The Truth About Closing Costs: What Every Homebuyer Needs to Know

If you're in the process of buying a home, you've likely heard the term "closing costs" thrown around. But what exactly are closing costs, and how much should you expect to pay? In this blog post, we'll explore some important facts about closing costs that every homebuyer should know.

What are Closing Costs?
Closing costs are the fees associated with the final stages of a real estate transaction. These fees are paid at the "closing" of the sale, which is the point at which ownership of the property is transferred from the seller to the buyer. Closing costs can vary depending on a variety of factors, such as the location of the property, the price of the home, and the type of loan being used.

What Do Closing Costs Include?
Closing costs can include a wide variety of fees and charges, such as:

1. Prorated property tax: divided property tax between buyer and seller proportionately to time of use or the date of closing

2. Title insurance: Paid to the title company and protects the lender and buyer if an ownership dispute or lien arises not found in the title search.

3. Escrow fee: part of the closing costs when you purchase a home, and they're paid to the title company or directly to the escrow company to set up escrow.

4. Notary / Signing Fee: This refers to the negotiable cost that the buyer has to pay to have the Deed of Absolute Sale notarized, which usually hovers around 1-2% of the property value.

5. Record Deed: The cost could range from a few dollars to hundreds based on the laws in your county. On average, home buyers pay $125 for recording fees at closing, according to the Home Buying Institute.

6. Appraisal Fee: Paying a professional home appraisal company is mandatory to evaluate the property's fair market value, which is used to calculate your loan-to-value (LTV) ratio. Typically between $300-500

7. HOA Proration: In general, HOA fees are prorated according to the number of days that the property is owned by each party during the month of closing. To illustrate, suppose that the closing date is March 15th and the monthly HOA fee is $300. At the time of closing, the seller would be responsible for paying $150 (15 days x $10 per day), while the buyer would pay $150 (16 days x $10 per day). The seller would be responsible for the full HOA fee for March and would subsequently receive a prorated credit from the buyer. Starting from the next month, the buyer would assume responsibility for paying the HOA fee.

8. Broker's commission ( when selling): a realtor commission credit at closing

9. County Transfer Tax: a real estate tax usually paid at closing to facilitate the transfer of the property deed from the seller to the buyer

10. City Transfer Tax: a real estate tax usually paid at closing to facilitate the transfer of the property deed from the seller to the buyer

11. Lender Origination Fee - The origination fee pertains to the amount that the borrower is charged by the lender for providing the mortgage loan. This fee encompasses various services such as processing the loan application, underwriting, funding, and other administrative tasks.

How Much Do Closing Costs Typically Cost?
The total cost of closing costs can vary widely depending on a number of factors. In general, buyers can expect to pay between 2% and 5% of the purchase price of the home in closing costs. For example, if you're purchasing a home for $300,000, you could expect to pay between $6,000 and $15,000 in closing costs.

Can You Negotiate Closing Costs?
In some cases, it may be possible to negotiate with the seller to have them cover some or all of the closing costs. However, this will depend on the specifics of the transaction and the willingness of the seller to negotiate.

How Can You Prepare for Closing Costs?
To avoid any surprises at closing, it's important to budget for closing costs ahead of time. Your lender will provide you with a Loan Estimate that will outline the estimated closing costs associated with your loan. It's important to review this estimate carefully and ask your lender any questions you may have.

In conclusion, closing costs are an important part of the homebuying process that should not be overlooked. By understanding what closing costs are, what they include, and how much you can expect to pay, you can prepare yourself for a successful and stress-free closing experience.

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