How Much Are Closing Costs?
Closing Costs Can Creep Up On You
That’s why we want to give you a heads up
It’s happened more than once and we can understand why. Everyone knows that you need a down payment to buy a house, most even know that a 20% down payment is the gold standard (even though you can give as little as 3.5%). What most don’t know is that there are closing costs associated with buying a home. What are closing costs? In short, closing costs are the costs associated with buying a home. These costs are split between the escrow costs, title costs, and lender costs. Both the buyer and seller of a home are charged closing costs with some variations between them. That’s the short answer. We will now take a deeper look at all three so that you have a better idea of what to expect.
Escrow Fees
We’ve explained what escrow is in a previous article we’ve written, you can actually check that out HERE if you’re interested. To keep this section short and sweet, escrow charges will come in a variety of line items. The most common of which are; “Escrow Tie-In Fee”, “Sub Escrow Fee”, “Currier Fee”, and many more. The list can be quite long but you’ll typically be looking at $3 for every $1,000 of value in the home. For example, if your house costs $450,000 you’re looking at an escrow fee of $1,350, give or take a couple hundred. The math breaks down to this (450 x $3 = $1,350). Each escrow company has their own fees that vary, some can be higher and others are less expensive. As a buyer in a seller’s market you’re pretty much at the mercy of the seller’s agent for the escrow company and title company used during the transaction. If you find yourself in a buyer’s market, you can expect to call more shots than usual.
Title Fees
Title fees are similar to that of escrow in that their fees can be broken down into roughly $3 for every $1,000 of value in the house. Just like with escrow, their fees can also vary and be more or less expensive depending on the company. You’re pretty much paying for the insurance policy stating that the home you are about to buy is free and clear of any liens or encumbrances and that nothing will rear it’s ugly head down the road to demand money from you. Other costs include a title search and settlement services.
According to U.S. News
Lenders require buyers to purchase title insurance that covers the lender up to the amount loaned. Most real estate experts recommend that buyers also purchase optional owner's title insurance to protect their own investment in the home. Both types of title insurance provide protection if someone claims they have an ownership right to your home or have not been paid for work on the property and have a lien against it. Title insurance can protect you if the previous owners failed to pay taxes on the property.
Basically, this cost is to cover your butt in case someone before decided to be negligent with services rendered or because they failed to pay Uncle Sam.
Lender Fees
Borrowing the money you need to buy a home, costs money. That cost is rolled into a few line items as well. The fixed costs are typically underwriting fees, processing fees, and other administrative fees. Those that vary are the origination points charged, upfront mortgage insurance premiums (if giving less than 20% down), and any point deductions should you be so inclined to buy down your rate. These fees are can be adjusted depending on your situation and the value of the home you’re buying. These last three items I listed are typically a percentage of the loan amount.
Closing Costs Totaled Up
These three fees can come together to total your remaining balance AFTER your down payment. To be on the safe side, you want to set aside another 1.5% to 2% just for closing costs. This may seem like a lot, it very well can be, but there are options for those of you that do not yet have that much saved up, or for those of you who have only considered your down payment. Lenders can sometimes contribute to your closing costs in the form of a “Lender Credit” this usually can result in a bit of a higher interest rate, but it can definitely help in case you happen to be a bit short. If your realtor is savvy enough, you can add the closing costs to the purchase price and credit that amount back to yourself to cover the fees. For example, if the house you want is $400,000 and your closing costs are $8,000, you can offer $408,000 and ask the seller to credit that $8,000 back. This is a more advanced trick and you definitely want to ask your realtor if this strategy is advisable in your current market, but it can work. In a buyer’s market, like what we experienced in 2008-2010, buyers were capable of having the sellers pay for ALL of the buyers closing costs. We’ve seen this strategy used, in full or partially, in recent months by certain realtors we’ve worked with. If you’re interested in that strategy, let us know and we can get you in contact with those that have successfully done that on multiple occasions.
In Conclusion
Closing costs are broken down into Escrow Fees, Title Fees, and Lender Fees
Typically they total 1.5% to 2% of the purchase price
They can be taken care of in the form of lender credit, a credit back from the seller, or taken care of completely by the seller
We at American Freedom Funding aim to make the process as transparent as possible. We know that buying a home can be a scary and daunting ordeal, but we have done this for a long time. We are here to make sure that you are happy and comfortable with the monthly payment, it fits with your lifestyle, and there will be no surprises in the end. You are family to us and as such you will always be our top priority.