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What are my Closing Cost and who’s paying them?

If you’re a first-time homebuyer, closing costs may take you buy surprise. These are additional out-of-pocket expenses that cover of a number of fees involved in the mortgage loan process. Closing costs generally amount to from 2% to 7% of the home’s purchase price. These expenses are on top of the sale price you negotiated with the seller.

Closing costs can include:

  • Attorney fees
  • Title search to determine if there are any liens against the property
  • Title insurance to protect you and the lender if there are any lien claims
  • Transfer taxes
  • Appraisal for ensuring the home matches current market value and loan amount
  • Home inspection, as required for loan approval
  • Prepaid interest
  • Prepaid private mortgage insurance (PMI) for down payments of less than 20%
  • Cost of underwriting.
  • Obtaining a credit report.
  • Application and origination fees to cover time and paperwork in processing the loan
  • Discount or mortgage points fees in exchange for a lower interest rate

Some of these costs are upfront, before the property is officially sold, while others are paid at the time when you close on the sale and the loan. You will also probably have to establish an escrow account to fund your tax and insurance payments. Usually, you will need to prepay the first year of property taxes and home insurance premiums at closing.

The seller also covers some closing costs, including:

  • Sales taxes
  • Title transfer fees
  • Attorney fees
  • Certain closing fees
  • Realtor commissions

How to estimate what your closing costs will be.

There’s no one-size-fits-all formula for estimating your closing costs. That’s because the costs are set by state, county, and municipal authorities. These legal requirements can vary greatly. You can’t assume the closing costs in one locale will be similar to those in a different community. Fortunately, you can get a good idea what yours will be by using an online closing cost calculator. Better yet, consult with a real estate agent or lender familiar with the area. Their local expertise can be very important.

Federal law requires lenders submit a closing disclosure at least three days before your closing. This disclosure will state the exact amount of the closing costs you are required to pay.

How to reduce your closing costs.

Most closing costs are unavoidable, but there are steps you can take to reduce them.

  • Shop for title services, if possible. Title related fees, such as title searches and title insurance, can account for almost 70% of your total closing costs. Just as you shopped for the best lender, you can also shop for the best title company. Do some research and compare several title companies. It’s possible you may save hundreds of dollars.
  • Ask for the seller to pay some of your closing costs. In your negotiation with the seller, you could ask the seller to pay some your costs on closing day in exchange for adding those costs into the total purchase price. In other words, you pay less at closing but will pay a little higher monthly payment.
  • Ask the lender to pay closing costs. Sometimes the lender will agree to pay some of your closing costs in exchange for a higher interest rate on your mortgage. You’ll pay more interest, but you won’t have to pay as much cash up front.

Just don’t make the mistake of cutting corners. For example, don’t skimp on owner’s title insurance just to save money. This insurance protects you in case there is an undisclosed lien on the property or if the previous owners failed to pay the property taxes.

There’s one other resource to help you plan for closing – your Caliber Loan Consultant. Our goal is to make buying a home as painless and uncomplicated as possible. We are committed to helping you navigate the process by providing transparent, honest, and straightforward service. Use our branch locator to find your nearest consultant.

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