Closing costs: a generic term tossed around by mortgage originators, real estate agents and even your neighbor. But what are these fees all about? How much do they normally cost, why do they matter and who pays them? Read on to learn the basics of closing costs for new-construction and resale homes and how they can affect your home purchase.
What are closing costs?
Closing costs, or settlement costs, are one-time expenses charged in connection with the purchase of a home and the origination of your home loan. They cover additional costs like loan origination fees, loan discount points, appraisal fees, title search fees, title insurance premiums, survey fees, transfer taxes, recording fees and credit report charges. Closing costs will be disclosed to you on your Loan Estimate Disclosure and Closing Disclosure.
How much should I set aside?
Closing costs on new construction and resale homes typically run between 3% and 5% of the home’s purchase price. This percentage should give you a general idea of how much to budget even before receiving a Loan Estimate from your lender. Your loan type, down payment amount and the state in which the home is located will all factor in to determining how much money you need to set aside for closing.
Who pays closings costs? Can I get assistance with them?
The buyer will typically pay the closing costs, but this may differ depending on the situation. Some people buying resale homes ask the seller to pay these fees during negotiation, but if homes are selling quickly in your area or there is more than one offer on the table, your real estate agent may advise against it. If you choose to buy a new-construction home, check to see if the builder is offering closing cost assistance at any of its locations.
What is a Loan Estimate?
A Loan Estimate, or LE as it is more commonly known, is an itemized list of fees and costs associated with the loan that the lender must provide the borrower within three business days of a completed loan application. True to its name, a Loan Estimate is just that—an estimate. Some closing costs can change, but if they do, your lender may provide you with a revised LE and explain the changes. You can use Loan Estimates to compare the closing costs for different lenders and compare the actual closing costs shown on the Closing Disclosure when you ultimately close on your mortgage loan.
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