It is a term that is common when we talk about home loans, home equity lines or credit, and mortgage lenders: Home closing costs. Here, we look at what exactly these fees are and what you need to know to get the most value when you sign on the dotted line.
One: What exactly are closing costs?
Home closing costs are fees required at the time you sign for your loan, in addition to your down payment. They can include attorney fees, fees for a title search, title insurance, taxes, lender fees and sometimes homeowner’s insurance, but these fees can vary based on your lending institution and the state where you live or own property. Some fees are fixed like the recording fee or the transfer tax fee that is charged by the state or local government, but others like the lender fees can be negotiated.
What’s included in home closing costs?
Generally, closing costs fall under three main categories:
Lender fees involve all fees the lender takes on providing you the loan, such as loan origination fees, courier fees, home appraisal costs, administrative fees, credit checks, transfer fees, and underwriting fees. There can also be a charge for flood certification if required.
Points, if an option, can also be included under lender fees. If you are not strapped at closing with the money for closing fees and the down payment, asking your lender about the availability of discount points may be a good idea. With this option, you can pay for discount points – one point equals 1% of the price of the loan. Every point then can be used to lower the interest rate on the loan.
Title fees can add a significant amount to the overall closing costs. Title fees can encompass the fees for a title search and title insurance. This can include title insurance to cover the lender, and optional owner’s insurance to protect you. This comes into play if you purchase a home, and down the road, someone else claims to own it or has not been paid for work on the home or owe taxes on the home. Title insurance insures your title and helps you avoid any future legal fees sorting things out.
Prepaid costs. Another component of closing costs are prepaid expenses that can vary by lender. Sometimes lenders collect two to six months’ worth of homeowner insurance premiums and property taxes to be held in a special escrow account. If you are able to put more than 20% of the loan amount down, you may be able to lower the amounts held in escrow.
The majority of closing costs, typically, are paid by the buyer. As a buyer, it is not likely that you can avoid paying closing costs entirely. Sometimes lenders offer incentives with deals on closing costs and points, but it is important to review those offers closely. If they sound too good to be true, they probably are.
Also, if you are borrowing through a homebuyer assistance program, there are loans available that have slightly higher rates, but cover the cost of some or all of your down payments as well as your closing costs. In this case, the buyer is still paying the closing costs but the fees are not due at signing.
Three: How can I save on closing costs?
There are some ways to save money at closing. Buyers can ask sellers to raise the purchase price of the home in exchange for a credit on the closing costs. This way the additional cost of closing is factored into the selling price of the home and thus into the overall mortgage. The buyer may spend more over time, but it can reduce the out-of-pocket costs at closing. As the buyer you can also request lender-paid closing costs. In this case, the lender may take on the costs, but in exchange they may charge a higher interest rate.
Another tactic that may lower the cost of closing is to negotiate the closing date. If you close at the end of the month, you may only be charged one or two days of prepaid interest. However, you may have to pay the full 30 days of interest if you close at the first of the month. Ask your lender what implications your closing date may have on the actual insurance fees due.
Other ways to save include:
- Ask your lender about discounts and rebates. Some commercial banks will offer incentive to new borrower like $500 off a home purchase or loan origination fee.
- See if you can cover title fees on your own. You may be able to get a better rate on title fees, title search and title insurance from a third-party vendor before your closing date.
- Shop around. As you are researching loans, get a loan comparison sheet for every offer. As you compare interest rates and terms, take a close look at closing to see what is included and what can be negotiated.
Home closing costs are key components of every home loan. For people buying new mortgages, it can be challenging to both save for a down payment and save for closing costs at the same time, especially when closing costs fluctuate and you may not know exactly how much you need until close to closing time. For people who are refinancing or getting a second mortgage, closing costs can be a factor in determining if refinancing is worth it overall. It is important to weigh a new interest rate against how long you expect to be in your own to determine if the closing costs are a smart trade off.
At Guaranty Bank, we are always happy to answer any questions that you may have about buying a new home and closing costs. Contact one of our Mortgage Loan Officers to schedule an appointment!