Jeffrey Harrington's Blog
When you’re buying a home, there’s a lot to think about. Your finances probably have the biggest impact in the entire home search process. The amount of a down payment you have and the amount of loan you’re approved for help decide what you can buy.
When you hear about closing costs, what do they entail? How much will you need to cover these costs? Many people get to the closing table for their home purchase and feel unprepared. You’ll need a certain amount of cash on hand when you finally close on a home. Learn more about closing costs, so that you understand everything that you need to know about your home purchase.
Closing costs are spelled out pretty plainly in just about every kind of real estate contract. These costs are the fees associated with the title companies, attorney, banks, lenders and everyone else who is involved in the purchase of a home. The closing table is also the time when you provide your sizable down payment. The closing costs that are being referred to are considered a separate expense independent of the closing costs.
Closing Costs Vary
Closing costs can range from anywhere between 2 and 8 percent of the purchase price of the home. You can’t really “choose” what’s included in the closing, so you’ll need to have an idea of how much money you’ll need to write a check for. Lenders can give you an estimate of about how much closing costs will be.
Certain things like the realtor’s commission fees can be negotiated and can be paid for by the buyer or the seller. The good news is that you can roll your closing fees in with your mortgage in some cases. You may also be able to negotiate with your lender to pay the closing costs for you in exchange for a higher interest rate.
What’s Included In Closing Costs?
Depending upon where and what type of home you’re buying, what the closing costs actually cover varies. Here’s just some of the things that closing costs cover:
- Escrow fees
- Credit reports
- Title search
- Title exam fee
- Survey fee
- Courier fee (Most transactions are done electronically, but in some cases this may be necessary)
- Title insurance
- Owner’s title insurance
- Natural hazards disclosure
- Homeowner’s insurance (Your first year of insurance is often paid at closing)
- Buyer’s attorney fee
- Lender’s attorney fee
- Transfer taxes
- Recording fees
- Processing fees
- Underwriting fee
- Pre-paid interest
- Pest inspections
- Homeowner's association transfer fees
- Special assessments
These fees vary widely by state and the type of property that you’re purchasing. Not every fee is required, but the above is just a list of many of the possible fees that could be included in on the closing of the home you choose.
- Finances. We hate to put it first, but the reality is your finances are one of the main things that determines your preparedness for becoming a homeowner. Unlike renting, there's a lot more that goes into the home financing process than just your income. Banks will want to see your credit score to ensure you have a history of paying your bills on time. They'll also use your credit information to see how much debt you have and if you'll be able to take on homeowner's expenses on top of that. Another financial impact for buying a house is to determine if you can afford a downpayment. It's one thing to see that you can cover your bills with your income, but unless you have enough money saved for the downpayment (and any emergency expenses that may come up) you should wait a while and save before hopping into the market.
- What are your longterm plans? Many people are excited at the thought of home ownership to the extent that they forget their life circumstances. If you have a job that might cause you to relocate in the next 5-7 years you might want to consider renting rather than buying. Depending on factors like the price of the home, cost of living in your area, and how long you plan on living in your new home, it may be cheaper to buy or rent in the long run. There are calculators available online that will tell you which option is probably more cost-effective for you. As a general rule, however, if you plan on living in a new home for under 5-7 years, it might be cheaper to rent.
- Do you have the time and patience to be a homeowner? Owning a home means you can't call on the landlord to fix your leaks anymore. Similarly, you probably won't be able to depend on someone else to shovel snow or mow the lawn for you. It takes work to be a homeowner, and if your job has you away from home for long periods of time or working very long hours, renting might not be appropriate at this time.
- Plan for new expenses. If you can comfortably pay rent and you find out your home loan payments will be comparable, you should know that there will likely be new expenses to consider as well. Home insurance, property taxes, and expenses for things like sewer, plumbing and electrical repairs all should be taken into consideration. Additionally, you will likely have new utility bills, including electricity, water, oil, cable, and others depending on the home.