First-time buyers who are excited to finally close on their home need to make sure they’re familiar with all the costs upfront. It might come as a surprise that the mortgage and downpayment are only one side of the story. Closing costs are additional fees that are associated with the purchase of the home. These will need to be paid at the time of closing the transaction.
When exactly is the closing of the home? This is the time when the title of the property is actually transferred from the original seller to the new buyer. Closing costs can be paid by either the seller or the buyer, depending on the situation. This guide will further explain how to navigate the closing process as well as the average costs.
What are the typical closing costs?
First, let’s discuss what the closing costs actually are. There are several fees that make up the total closing costs, and you might not need to pay all of them. For instance, many states don’t require you to purchase a home with the help of an attorney, so attorney fees wouldn’t be necessary in that case. Check with your real estate agent for a better estimate of what you can expect to pay in your areas.
- Appraisal – You’ll need to pay an appraisal company to check the market value of your home before sale. This might also include specialized home exams for things like A/C or pest control.
- Attorney Fee – If you need an attorney to review your documents, you’ll need to pay their fees.
- Loan Fees – The fees associated with applying for your mortgage such as your application, underwriting, and credit report fees.
- Property Tax – Taxes on the cost of the property which will be due usually within 60 days of purchase to the lender.
- Private Mortgage Insurance (PMI) – If your downpayment is under 20%, you’ll likely need to purchase PMI. Usually, the first month of PMI needs to be paid at closing.
- Title Fees – If you need extensive property records, you’ll need to pay a fee to the title company for this research.
- Transfer Taxes – The tax you’ll need to pay on your home when passing the title from the seller to the buyer.
How much are closing costs when buying a home?
Now that you understand the most common costs that make up the closing costs, it’s time to talk averages. While there is no one-size-fits-all to closing costs, most home buyers pay between 2 to 5 percent of the purchase price on their home. That means if you’re buying a home that costs $150,000, you can expect to pay around $5000 in closing costs.
These costs also vary depending on the state. Arizona, for example, has some of the highest closing costs in the country with an average of just under $2,000 in closing costs for a $200,000 home purchase with a 20% down payment.
You can expect to pay more in closing costs if you make a lower down payment in most cases. However, many closing costs are negotiable. Your lender will include closing costs in their initial estimate, and you can also shop around for a different estimate. There are also programs based locally and nationally that help cover or lower closing costs, especially for first-time buyers.
Talk to your lender and your real estate agent about your closing costs before you approach your closing date. You might be eligible for discounts or programs that you didn’t know about. Either way, it’s important to know what to expect before you officially close on your home.