Buying a home or land is a financial goal for millions of people every year. However, real estate transactions can be complicated, and it can be difficult to know exactly how much you need to pay and when. We often find closing costs are one of the most confusing aspects of buying property. They also represent a significant portion of upfront expenses buyers need to bring to the table.
In order to help you appropriately budget for your property purchase, we broke down a summary of closing costs as well as a few tips on how you can reduce them.
What Are Closing Costs Anyway?
Real estate transactions involve many moving pieces managed by different parties. Closing costs are the fees paid to these parties to cover the cost of finalizing a mortgage and transferring a deed. While both buyers and sellers will pay fees at closing, the majority of closing costs are covered by the buyer and they usually equate to anywhere from 2% to 6% of the home’s purchase price. The exact fees ultimately vary depending on your location, but here is a quick breakdown of some of the most common line items:
- The Appraisal
Regardless of whether you’re buying a home or land, you’ll likely need to have it appraised if you’re planning to finance the purchase. Most lenders want to ensure you’re not overpaying in order to guarantee they’d be able to recover their costs in the event you default on your payments. Buyers typically need to cover the cost of a third-party appraisal, which can be anywhere from $400 to $1,000 depending on the property size. - A Loan Origination Fee
Underwriting a mortgage loan takes approximately 30 days and involves an in-depth review of your financial situation and a lot of paperwork. Your lender will charge an origination fee which covers the time and effort spent on the underwriting process. This fee is usually around 1% of the total loan amount. - Recording Fees
Once updated, your deed, mortgage documents, and other paperwork will need to be finalized and documented with your local county. Recording fees are small expenses that cover these costs. - Title Insurance Premium
If there are unpaid taxes or liens against the property or another party has a claim to it, title insurance protects you and your lender. You’ll likely be asked to pay the title insurance premium in full at closing. - Real Estate Stamps
Depending on where you live, your local government may charge taxes on property transfers. Florida’s documentary stamp tax is $0.70 per $100 in Volusia County. - Closing Protection Letter
Your title agent is responsible for a lot of the paperwork. The closing protection letter protects your mortgage lender in the event a title agent makes an error or fails to comply with procedures. This fee is usually a couple hundred dollars. - PMI
Many lenders allow you to close on a mortgage with less than a 20% down payment. The only catch is you have to pay Private Mortgage Insurance, which protects the lender if can’t pay your mortgage. Buyers usually have the option of paying PMI premium expenses as a lump sum during closing. - Pre-Paid Expenses
Your lender may require your homeowners’ insurance premium and your property taxes are pre-paid for the year at closing. If this is the case, these fees will be placed in an escrow account that will be continuously funded throughout the year via a portion of your monthly mortgage payment.
How To Reduce Closing Costs
You typically can’t avoid closing costs, but there are ways to reduce them. Here are a few tips:
- Compare Lenders
Lenders are required to disclose these costs within three days of receiving your application and many offer this information before you apply. If you’re able to get Loan Estimate worksheets from multiple lenders, you can shop around and choose one with the lowest closing costs. - Look For Vague Fees
When reviewing the itemized loan cost worksheets, ask your lender to walk you through each fee and use this as an opportunity to push back. It could result in the lender waiving certain costs. - Look For Financial Assistance
Local governments and nonprofits often have first-time homebuyer assistance programs that could pay for some or all of your closing costs. Minimum income requirements usually apply. - Ask The Seller To Cover Them
A Seller Assist is an arrangement that essentially allows you to finance your closing costs. The seller covers all or some of the buyer’s closing costs upfront, and then those costs are added to the final home sale price.
If you’re trying to determine how much you need to budget for a home or land purchase, it’s best to have an experienced professional in your corner. Contact Palmetto Realty today.