First-time Buyers: Everything you need to understand about closing costs
If you’re a first-time buyer, you’ve likely put a lot of thought into how much home you can afford. You understand the purchase price, the down payment and what kind of mortgage interest rate you’re in for.
What about extra costs?
Unfortunately, sometimes first-time buyers forget to consider all the costs, specifically closing costs.
Closing costs are those additional fees and expenses you have to pay when you finalize your home purchase. If you’re not expecting them, you may be in for some sticker shock.
Closing costs are those additional fees and expenses you have to pay when you finalize your home purchase.
Common closing costs:
- Taxes (avg 2 months city/county property taxes)
- Title search fee (avg $200)
- Loan origination fee (avg 0.5% of amount you’re borrowing)
- Mortgage application fee (varies)
- Inspection fee (avg $300-$500)
- Appraisal fee (avg $300-$400)
- Survey fee
- Prepaid interest (varies based on loan amount)
These are just a few of the fees and expenses that are commonly rolled into what we refer to as closing costs.
Just like the name implies, closing costs are due at closing, so you need to figure out how you plan to cover the cost.
The amount will vary depending on the home you choose, your down payment, your loan and how much you’re able to negotiate with the seller.
Typically, though, expect for closing costs to run between 2%-5% of the price of the home. Sometimes the cost can be slightly higher than that, and more likely in the 3%-6% range.
- $200,000 home= avg $4,000-$10,000 in closing costs
- $300,000 home= avg $6,000-$15,000 in closing costs
After first applying for the loan from a lender, you’ll receive a Loan Estimate that outlines your expected closing costs. Just days before the loan settlement, you’ll then receive a Closing Disclosure document from your lender.
Sometimes there will be minor adjustments to what came up during the Loan Estimate. It’s important to look through the document carefully so you understand what you’re paying for.
Options for covering closing costs
Sometimes buyers are able to negotiate closing costs as part of the deal. In this case, the seller may agree to pay some or all of your closing costs.
If that’s not an option, you may want to consider using some of the money you had planned to use as a down payment, and instead cover the cost of closing.
You can also choose to roll closing costs into your loan. In this case, though, you’ll end up paying interest on the closing costs.
There’s also something called a no-closing-cost mortgage. You don’t pay closing costs upfront, but just like the previous situation mentioned, those costs are then rolled into your loan. Typically, in this case you would end up with a higher interest rate.
When you’re buying a home, especially your first home, it’s important to know all the costs. This way you’re better able to plan out how to cover all the upfront costs required as part of the home buying process.