One of the aspects of buying a home that confuses many first-time homebuyers is the closing, and that associated dreaded unknown: closing costs. How much they are, what they’re for, and whether they can be avoided are common questions. Some potential homebuyers are even scared away from considering a home purchase because they’re afraid that they’ll be unable to afford the closing costs! In truth, closing costs are fairly easy to understand, anticipate, and—in some cases—even finance.
What they are. Although they vary from state to state, closing costs are generally comprised of fees, tax payments and pay for services, all associated with the transfer of a home from one party to another. These may include fees for filing paperwork with the county government, lawyer fees for the preparation and filing of other legal documents, and the pro-rated payment of property taxes from the time at which you take over ownership of the home. Fees for home appraisals and inspections, fees for the processing of your mortgage, and any real estate brokerage commissions are also typically paid at the closing.
How much they cost. While some costs are fixed, many of the other costs depend upon the sales price of your home, as well as the nature of any state, county or city fees or taxes. Generally, closing costs typically range from two to four percent of a home’s sales price, depending upon variables associated with taxes and the mortgage loan. According to Bankrate.com, the purchase of a home in Texas costing $200,000 will currently generate an estimated $3,855 in closing costs.
Who pays what. While the expense of closing costs may seem large, the buyer is not always responsible for all of these costs. For instance, the real estate agent commission—typically one of the largest of the closing costs—is generally paid for by the seller. Some fees, such as those generated by filing legal paperwork with the government, can be paid for by either the buyer or the seller. And for some borrowers, such as those using a VA loan, an even larger number of the closing costs can be paid for by the seller.
How to keep your cash. For those who want to keep their cash in the bank while still enjoying the benefits of homeownership, there are some ways to cut the closing cost expense. Some specialized loans, like FHA and VA loans, put caps on the dollar amount of closing costs, and also make it easier for borrowers to finance part of their closing cost responsibility. Many lenders also offer no-cost loans, which roll the closing costs into your mortgage, meaning that you don’t have to lay out a large amount of cash up front.You can then spread the closing cost expense out across a number of monthly mortgage payments.
As you can see, closing costs are highly variable, but there are a number of different ways to handle them, and they needn’t deter anyone interested in homeownership from pursuing that dream.