What are mortgage closing costs and how much are they?

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When buy a new housemany people focus on the quantity of a advance payment they will have to get a mortgage. But you also need to consider the additional expenses that come with the transaction, including closing costs.

Closing costs refer to the assortment of fees you must pay your mortgage lender when closing your home. They are due when you finalize your mortgage and take over title. They generally range from 2% to 5% of the amount you borrow and total thousands of dollars. Most are paid for by the buyer, but the seller may also have to pay some fees.

Closing costs can be significant and should be included in your home buying budget. Here’s everything you need to know about closing costs, how much they’ll cost you, and how to avoid last-minute surprises when closing on your new home.

What are mortgage closing costs?

Closing costs refer to the upfront fees charged to secure a loan and transfer ownership of a property, according to the Consumer Financial Protection Bureau. Sometimes they are called settlement fees.

They cover many behind-the-scenes transaction costs that your real estate agent, bank, title company, appraisers, and paperwork attorneys all have to pay. Some common closing costs include title insurance, government taxes, appraisal fees, tax service provider fees and prepaid expenses, according to a list published by the Consumer Financial Protection Bureau.

The buyer usually ends up paying most of these costs, but standard agreements vary from state to state and transaction to transaction. Sometimes a buyer can negotiate for the seller to pay some of the closing costs in exchange for a higher overall selling price, although in the current competitive housing market most buyers pay their own closing costs. Buyers can also have a lender contribute to closing costs, but this could result in a higher loan amount or interest rate.

What are closing costs used for?

Your closing costs will depend on your particular transaction and may be affected by interest rate, local insurance costs, tax rates, local appraisal fees and other factors. But here is a general breakdown of some of the common expenses covered by closing costs:

Title insurance: This protects lenders from financial losses arising from title issues, such as liens or property disputes.

Taxes: These could include property tax on the house, local government fees – such as the one for registering the sale of the property – and a tax for the transfer of title from seller to buyer.

Expert fees: These are charged by an appraiser to come to the property and assess the value of the home to determine an appropriate loan amount.

Tax service provider fees: These help pay third parties to track property tax payments and other tax monitoring tasks.

Prepaid expenses: These are items such as home insurance, property taxes and interest until the first payment is due.

How much are closing costs?

Most lenders and industry observers will tell you that your closing costs, on average, will cost you between 2% and 5% of the amount borrowed.

The national average closing cost for a single-family home was $6,905 in 2021, according to ClosingCorp, which analyzes closing cost data for the industry.

For a more accurate estimate, we used a closing cost calculator from BBVA banking service to show what those costs might look like for a $250,000 loan. After entering a 20% down payment, 30 years to the term, and an interest rate of 4%, the total closing costs were calculated at $7,042.

What are closing documents?

One of the key documents you’ll get before final signing is the closing disclosure, which outlines the details of your loan, including your closing costs. The lender must provide you with this document three business days before the scheduled closing of the loan.

It is important to review this document to ensure that all information is correct and that the terms of the loan are accurate and clear. This Closing Disclosure Explainer can help you when reviewing the document. You want to make sure your closing costs match the most recent loan estimate.

Other important closing documents include:

Promissory note: A legal document stating that you will pay off your mortgage.

Mortgage, security or deed of trust: Gives the lender the right to foreclose on your property if you don’t pay your mortgage on the terms you agreed to.

Initial Escrow Disclosure Statement: details the fees you pay each month to a blocked account.

Right of withdrawal form: Describes the rules for when and how you can cancel your loan, typically used as part of the refinance process.

If you have any questions about this, ask your lender, broker or lawyer for help.

Are closing costs tax deductible?

The only closing costs you can deduct are the points you pay to lower your mortgage interest rate and the property taxes you have to pay up front, according to the IRS. If you itemize, you can deduct these costs in the year you buy your home.

The IRS also has a list of closing costs that you can add to your home base. They include things like legal fees, registration fees and investigations. Tax rules are always changing, so we recommend talking to a tax professional about what you can and cannot deduct from closing your home.

Tips and Tricks to Save on Closing Costs

Saving all your money for the down payment is a house buying mistake to avoid. Closing costs will cost you thousands of dollars on top of your down payment, so be prepared to save for them too.

“In a seller’s market, we offered to reimburse borrowers for their appraisal fees, have a network of title companies that will reduce title fees, and offer grant programs to eligible borrowers to cover the down payment and some closing costs,” says Steve Twyman, Managing Director with Mortgage Experts. “There are also options for lender credits.”

It never hurts to ask the seller to pay the closing costs. “It’s a common occurrence, so don’t hesitate to ask. Remember, the worst that can happen is that they might say no,” says Orlando Miner, Principal of Miner Capital Funding, LLC .

But again, it will be harder to negotiate when it comes to a sellers marketAs is is currently in many parts of the United States.

Remember, the timing of your home’s closing is also important, as closing at the end of the month will save you on prepaid interest. “You have to pay prepaid interest from the date you close until the end of that month,” says Miner. “So the closer you get to the end of the month, the less money you pay.”

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