What Exactly Are Closing Costs?

Posted on Monday, February 8, 2021

Whether you are buying your first home or your third, you’ve probably heard of closing costs. But what are they exactly? How much will you need to pay? Is there a way to reduce that amount? Don’t worry, here’s a quick tutorial on everything you need to know about closing costs.

What are Closing Costs?

There are a number of costs and fees required to finalize your mortgage before you take possession of your home. Most of these costs will fall on the buyer although the seller is responsible for a few things such as the real estate agent’s commission. All of these fees must be paid before you get the keys to your new home.

How Much Do I Pay?

Typical closing costs range from 2 percent to 5 percent of the loan amount. That means if you take out a $200,000 loan to purchase your home, you will be responsible for paying anywhere from $4,000 to $10,000 in closing costs. While these costs are typically paid the same day you finalize the purchase of your home, it is sometimes possible to roll your closing costs into your mortgage.

OK, But What Exactly Am I Paying For?

Closing costs can be divided into property-related fees, title fees and loan-related fees. You also may have to pay mortgage insurance fees, property taxes and homeowners association fees.

Property-related fees include the cost of the appraisal, which verifies the amount your home is worth and the home inspection. The home inspection ensures that your home is structurally sound.

Title fees relate to who legally owns the home you are purchasing. Before you buy your home, your lender will request a title search to ensure that the person selling the house actually owns it. Lenders also require title insurance, which protects them in case an error was made during the title search. While not required, many buyers choose to purchase owner’s title insurance to protect against any claims are made on your home after closing.

By far the most numerous fees you will be paying are related to your home loan. These can include the initial application fee, attorney fees, loan origination fees, mortgage broker fees, prepaid interest and any discount points you may have agreed to buy.

Can I Reduce How Much I Pay?

There are ways to reduce the amount you have to pay. Nerd Wallet has put together an extensive list of the many ways you can lower your closing costs. Closing costs are often negotiable.

A great way to not have to write a big check when you close is to purchase a new home from a builder. Builders often run incentives offering to pay your closing costs up to a certain amount. That can reduce your costs or even negate the costs you pay. Want to learn more? Visit our builders’ model homes to find out what incentives they are offering.

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