Understanding Closing Costs
Most folks understand that when planning to purchase a home, they need to have money ready for a down payment. Another item they should plan for is the Earnest Money Deposit, or Initial Deposit, which is typically a percentage of the sales price and is usually paid within three days after their offer is accepted. This deposit is counted toward the purchase price at the end of the escrow.
What fewer people are aware of are closing costs, which are paid when the escrow closes. Buyers can be caught off guard if they are not aware that they need to budget for these costs as part of the overall home purchase cost.
What Are Closing Costs?
Closing costs are a collection of fees and payments made to a variety of individuals and organization who are involved with your transaction. While these costs vary by location and situation, they often include:
- Government recording costs/fees
- Appraisal fees
- Credit report fees
- Lender origination & processing fees
- Title services (e.g., title insurance, title search, notary fees)
- Tax service & Transfer fees
- Survey fees
- Underwriting fees
- Inspections – though these fees are usually paid up front vs at closing
Knowing what to budget is an important part of the home buying process that many buyers overlook. According to Freddie Mac, closing costs are usually between 2% and 3% of the total purchase price of your home—quite a significant amount!
How to Reduce Closing Costs
- Compare loans: Some of the fees that fall under closing costs can be reduced by doing ample research on lenders and the loans they offer at the beginning of the homebuying process.
- Choose a lender with low fees: Compare potential discounts or deals offered by various lenders.
- Negotiate with the seller: Try to negotiate with the seller to pay a portion of the closing costs.
- Purchase less home: Buyers should make sure that the home they are buying fits their budget.
In starting the homebuying process, buyers should first find out how much they can afford by working with their lender to get pre-qualified. Then ask questions about fees and costs along the way so there are no unpleasant surprises when it comes time to close the deal. By inquiring with their lender, their escrow officer/title company, and their agent, a buyer should have a pretty clear picture of what will be expected at close of escrow.
Debbie Austin is a realtor associate with Keller Williams, Roseville and has been helping clients buy and sell property in the area for 18 years. If you have a specific real estate question you wish to see addressed, contact Debbie at debbieaustin@kw.com or debbieaustingroup.com
