What Are My Closing Costs When Buying a Home?

When buying a home, there are many costs associated with the purchase beyond the earnest money deposit, the remaining down payment, and mortgage payments. One of these costs is called “closing costs,” which can add up to several thousand dollars. Understanding what closing costs are and how they work is essential for homebuyers, especially first-time buyers. In this blog post, we will explain what closing costs are, what they include, and how to estimate them.

What are closing costs? Closing costs are fees associated with the purchase of a home that are due at the time of closing. These costs are typically paid by the buyer and the seller and cover various expenses related to the purchase transaction. The amount of closing costs varies depending on several factors, such as the purchase price of the home, the location of the property, and the type of mortgage loan used to purchase a property.

What do closing costs include? Closing costs can include a variety of fees, such as:

1. Loan origination fees: These are fees charged by the lender for processing the loan application.
2. Title search and insurance: These fees cover the cost of ensuring that the property has a clear title and is free of any liens or encumbrances, such as claims made against the title to the property. Title insurance is intended to protect buyers and sellers alike to insure against any claims against the title to a property.
3. Escrow fees: These are fees charged by an escrow company for reviewing and preparing legal documents.
4. Prepaid expenses/prorations: These are expenses that are paid in advance, such as property taxes, homeowners’ insurance, and mortgage interest.
5. HOA fees: If you’re buying a home with a homeowners’ association, there are usually fees charged by the HOA when selling a home, such as disclosure fees, HOA dues, and capital improvement costs (usually a small percentage of the sales price)
6. Recording fees: These are fees charged by the local government for recording the deed and other legal documents.

How to estimate closing costs? Closing costs typically range from 2% to 5% of the purchase price of the home, not including broker commissions, which are typically between 5%-6% of the purchase price.  In states that use attorneys instead of title companies to conduct a closing, there are attorney's fees to be paid as part of the closing process. Closing costs also do not include the payoffs of any loans on a property being sold.

To estimate the closing costs, buyers can use online calculators or consult with their real estate agent or lender. It's essential to review the closing disclosure document before the closing to understand the exact costs and ensure that there are no unexpected fees.

Some closing costs are negotiable, and buyers can ask the seller to pay for them as part of the purchase agreement. In some cases, buyers can also negotiate with the lender to reduce or waive some of the fees.

Closing costs are an essential part of the homebuying process, and it's important to understand what they are, what they include, and how to estimate them. By doing so, buyers can be better prepared for the costs associated with buying a home and ensure a smooth closing process.