How to Budget for Closing Costs
When buying a home, the term "closing costs" often comes up. Closing costs is a general term for the fees an owner has to pay for their property separate from the mortgage. They typically total anywhere between 1 – 5% of the total cost of the home, so it's important for homeowners to keep the additional charges in mind when negotiating their offer and loan structure. To find out more about how homeowners can better plan their budget, keep the following facts in mind.
Fixed and Variable Closing Costs
Closing costs can range from the real estate agent commission to home inspector charges. Some closing costs, such as property taxes (which are prorated to the closing date), are generally fixed for homeowners. However, some costs are variable. These variable costs are often dependent on the location and state of where the home is located. For instance, some states require home buyers to hire an attorney to approve the home paperwork before the home sale can go through. There are also different conditions on closing costs based on the loan the buyer takes out, so buyers may want to do some research. For example, a VA loan will typically waive certain costs that other loans may not.
Closing costs: Who Gets Paid
Closing costs can included many different costs and the entities that generated them. Generally, most closing costs will included one or more of the following:
- PMI: Private Mortgage Insurance (PMI) is an insurance policy the lender takes out to cover a property in the case of default. It's typically required of all buyers who put down less than 20% on the cost of the property.
- Title Company: The title company researches the history of the property to see if the title is clear to transfer to a new owner. If there's a lien on the house or an individual that may be contesting the property, they'll let the buyer know before closing can occur.
- Lender: The lender may charge a variety of fees to run credit histories, appraisal fees, process applications, and provide ongoing services to the homeowner.
- Housing authorities: From the inspector to the appraiser to local officials, homeowners may need several different authorities to approve the home before the sale can go through.
Odds and Ends
Homeowners usually pay for most closing costs at closing in cash. However, some Pacific Palisades home buyers may roll some of their closing costs into their mortgage payments. Before rolling all or some of the closing costs into a mortgage, potential home buyers should seek the advise of a financial or mortgage professional. In most cases, the more closing costs rolled into a mortgage, the higher the monthly mortgage payment as these costs become a part of the principal amount of the loan.
Who Pays Closing Costs
In some cases, sellers may be allowed to cover some or all of the closing costs for home buyers. This payment of closing costs by sellers for the buyers is often a home selling/buying negotiation tool - especially in home buyer markets. Buyers will need to find out how much sellers are allowed to contribute first before heading into negotiations. The amount can vary based on the type of loan, so it may help to talk to the lender or a real estate agent. Sellers may also be willing to lower the total cost of the home instead of paying for the closing costs outright.
Closing costs are a complicated but necessary part of home buying. To budget for them, buyers have to be ready to ask questions, challenge the seller, and do their research. A real estate agent can be an extremely helpful asset for those who are ready to crunch the numbers.