When you’re thinking about buying a home, it’s easy to become obsessed with calculating your mortgage. You’re constantly tweaking the numbers after every open house, trying to understand what you can actually afford. The problem is that most mortgage calculators fail to account for closing costs hidden within the homebuying process, so they’re easy to miss. Just when you think you’ve saved enough for a downpayment, you can get blindsided by thousands of dollars in fees. We think the best buyer is an educated buyer, so we wrote this piece to give you an overview of typical closing costs and how to avoid paying them at all.
Closing Costs vs. Prepaid Costs
Closing costs are paid when ownership is transferred to a home buyer. These fees cover everything from processing your loan application to hiring a courier service for your documents. Before diving into a discussion about closing costs, it’s important to distinguish them from prepaid costs. While closing costs are generated by the home purchase itself, prepaids are just normal expenses that are put into escrow (an account held by an impartial third party until closing). Prepaids set you up for your early days of home ownership by covering future taxes, insurance, and interest. Closing costs, on the other hand, are one-time fees that leave your wallet forever once the paperwork is signed.
Estimating Closing Costs
The main categories of closing costs are lender fees and third-party fees. The lender side deals with everything associated with your mortgage. As the buyer, you’re responsible for paying fees for document preparation, loan processing, loan insurance, and tax services. Beyond these transactional fees, the lender also charges for committing to the loan, compensating the mortgage broker, and buying title insurance to protect their investment against ownership disputes such as unknown liens or boundary issues. The good news is that you can request an estimate from each lender and compare apples to apples to find the best deal. For third-party fees, however, the task of comparing quotes is much harder. You’ll likely spend hours on the phone trying to get pricing information from multiple companies across different lines of work.
After submitting your offer, you’ll have a short window to coordinate between inspectors, appraisers, insurance agents, title companies, and attorneys. The logistics can feel overwhelming and it’s easy to lose track of what you’re being charged. Fortunately, our brand new Closing Cost Calculator is here to help you understand what each cost is for and how much you can expect to pay.
Paying for Closing Costs
Now before you resign yourself to paying thousands of dollars in fees, you should explore a few cost-saving alternatives. Being a military member or union member, for example, can entitle you to closing cost benefits. You can also ask the seller for a closing cost credit, which has benefits for both sides of the transaction. Buyers can request a seller credit in exchange for an increase in the overall sales price, giving the seller more cash-in-hand and the buyer less out-of-pocket costs at close. This method works best in slow-moving markets where sellers are willing to incentivize a deal. Lenders cap the amount of fees a seller credit may cover at 3-6% of the loan amount.
A more reliable approach is to negotiate with your lender. You’ll likely find banks that offer preferred customer reward programs, institutions that provide closing cost discounts, and loan packages that wrap closing costs into the mortgage. These options are less than ideal because you end up paying more in the long run through higher interest rates.
Still have questions? We’re always here to help. Reach out at any time and one of our agents will assist you with anything you need.
The Torii Team