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The home buyer's guide to closing costs

Understand what closing costs are and what to expect during the closing process when you're buying a home

If you're a first-time home buyer or new to the world of real estate, you've probably heard the term "closing costs" when researching the home-buying process. Today we'll take a closer look at what closing costs are, what they include, who is responsible for them, and things to consider when you're buying a home.


What are closing costs?

Closing costs are expenses that buyers of real estate properties incur during the conclusion of a sale transaction. These include fees for document preparation, government filings, attorney fees, and other administrative costs. These costs can range from 2 to 5 percent of the home's purchase price and are often overlooked by first-time home buyers. Buyers should always budget for these costs in addition to the down payment, otherwise, they may find themselves short on cash at closing.



What closing costs should you expect to pay?

Before we dive into the nitty-gritty of closing costs, it's essential to understand the different fees involved, the parties responsible for paying them, and their approximate costs. Below are the most common closing costs that buyers need to know:

Loan Origination Fee

This is a fee charged by the lender to process your loan application, and it is typically 1 percent of your loan amount.

Appraisal Fee

An appraisal is a requirement by most lenders to determine the value of the property you are buying. The appraisal fee is usually $300-500.

Title Search and Title Insurance Fees

These fees are typically lumped together as part of the closing process. 

Title search refers to the process of searching public and private records to verify ownership of a property and to ensure that there aren’t any liens or other encumbrances attached to it. The purpose of a title search is to provide a clear and marketable title to the buyer. The typical cost of a title search is between $75 and $200.

Title insurance is a type of insurance policy that protects the buyer and lender from financial loss due to defects in the title that were not uncovered during the title search. Title insurance covers a wide range of issues, such as undisclosed heirs, recording errors, or fraud. Your bank will require title insurance to lend you money for your home. The typical cost of title insurance is around 0.5% to 1% of the loan amount.

It is important to remember that these costs can vary based on location, property value, and other factors. Consult with your real estate agent or attorney for a more accurate estimate.

Home Inspection Fee

A home inspection is typically optional. However, it’s strongly recommended to hire an inspector, so you can avoid any surprises once you take possession of the property. A home inspection costs from $350 to $500, depending on the property's size and additional services needed.

Prepaid Expenses

Buyers are required to pay some of the costs in advance, like property taxes, homeowners insurance, and mortgage insurance. These costs depend on the property's location, loan type, and other factors.


Who is responsible for paying closing costs?

Typically, the buyer pays these fees. However, in some states, the seller may have to pay for certain fees like transfer taxes, attorney fees, or the commission of a real estate agent. 


Is it possible to save on closing costs?

While most closing costs can't be avoided, some closing costs, such as appraisal fees and home inspection fees, may be negotiable with the seller. There are also some other ways to potentially save a bit on closing costs. 

Shop around for quotes

Buyers can shop around for lower closing costs by comparing estimates from different lenders, insurance companies, and inspection companies. Keep in mind, while it's always worth looking for alternatives, you want to make sure you're working with reliable, reputable companies in every aspect when you're buying a home.

Government programs

Some government programs, such as the FHA, offer assistance with closing costs for first-time homebuyers.

Consider your loan type

Closing costs may differ depending on the loan type, such as FHA or VA loans, which have their respective closing costs. In some cases, negotiation can help to reduce some of these fees, such as title insurance or the lender’s origination fee.


How to prepare for closing the right way

It is best to know about the closing costs before purchasing a house. It can help take the stress off and prepare you for additional expenses. Understanding these costs can help with budgeting and preparing for the purchase, and ensure the smooth closing of your new home.

Talk to your real estate team early on about closing costs. They can likely recommend companies to work with, and can help you keep track of what you need to bring to the table for closing. 

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