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How Much Are Closing Costs, and What Can Be Done to Lower Them?

Monday, November 16, 2020

In the United States, the average cost for closing costs is $4,876. Closing costs amount can vary significantly from state to state, though, which is why many potential homebuyers wonder how much are closing costs for their area.

For example, in Alabama, closing costs are around $2,000, while in New York, they cost homebuyers around $12,000

What do closing costs include, though? 

This guide will further explain what's included in closing costs and how to keep those costs down.

What Are Closing Costs?

Closing costs are the fees that must be paid when a home purchase is finalized. Buyers and sellers both pay closing costs to those who help facilitate their transactions.

Typically, the seller's closing costs include a commission to their real estate agent and ownership transfer fees.

A buyer's cost includes things like:

  • Mortgage insurance
  • Appraisal fees
  • Property taxes
  • Homeowner's insurance

The parties involved in approving, funding, and insuring the sale must be compensated, which is why there are closing costs. Sometimes, buyers negotiate with the seller to cover some of their closing costs. 

Typically, closing costs aren't included within the listed purchase price of the real estate in question. For buyers, closing costs can be added to the mortgage and repaid in installments.

Closing Cost Estimator

A closing costs calculator can help you determine what your costs might be. However, typically, closing costs account for 3% to 5% of a home's closing price.

For a $600,000 home, closing costs at 5% would be $30,000.

How to Lower Closing Costs

Closing costs are inevitable during a home purchase, but there are things you can do to keep costs lower. Let's take a look at some of the things you can do to lower your closing costs during a home purchase.

Shop Around Where You Can 

Take a look at your loan estimate form, which a lender must provide within 3 days of a completed mortgage application. The loan estimate form includes your interest rate, monthly payments, and loan amount. On the next page, there's a section called "services you can shop for."

The vendors listed are your lender's preferred vendors, but that doesn't mean you have to use them. You can shop around to find lower fees for things like a survey, pest inspection, and fees for the title search and settlement agent.

If you can, compare offers from other lenders so that you're not limiting yourself to one offer.

Know Which Fees Can Change

Many homeowners don't know that some fees listed on the loan estimate can be changed, even though others are locked in.

When you choose to use a company recommended by your chosen lender, things like title services and owner's title insurance can't increase by more than 10% upon closing. However, when you opt to use other service providers, closing costs could rise a lot more.

Review your loan estimate carefully.

Look for Grants and Discounts

Many states offer deals for first-time homebuyers and offer assistance for qualified buyers. Look for grants, ask about discounts and rebates, and save as much as you can on your title insurance.

Try to Close Near the End of the Month

Try to close at the end of the month, if you can. If they're as low as you can get them and you still can't afford closing costs, consider folding them into your mortgage with the rest of your loan.

Prepaid interest comes into play when refinancing or buying a home, so closing at the end of the month can help you save on that prepaid interest.

When you take out a new home loan, you'll have to prepay interest accrued from the closing date until the end of the month. You could save anywhere from a few hundred to a thousand dollars when you close closer to the end of the month.

Ask the Seller to Cover Some of the Closing Costs

If you're tight on cash, you can always consider asking the seller to help you pay for some or even all of your closing costs.

It won't be an easy venture if you're buying in a hot seller's market. However, if the seller is anxious to make the transaction, you could easily get some of your costs covered.

If you're unsure, ask your real estate agent for advice as to whether or not you should try and negotiate. It's best to ask for a specific dollar amount so the seller can give you a clear yes or no. Remember that certain loan programs limit how much sellers are permitted to contribute, too. 

If you're unsure, you can always ask your lender if your loan has any listed limitations.

Watch Out for No Closing Cost Mortgage Offers

Some mortgage companies offer no closing cost mortgage loans. If that's the case, make sure there isn't a "catch" to the offer.

Many times, the no cost mortgage is made possible with a higher interest rate for a lender credit. The lender credit gets applied to your closing costs. It can be a good option if you're strapped for funds, but it can cost you more in the long run.

Take a look at your finances and your time frame to determine whether or not it's a good option for your situation.

How Much Are Closing Costs?

How much are closing costs? The answer depends on the home purchase amount and the state in which you live. However, there are many things you can do to lower closing costs as much as possible.

Look for rebates and grants, compare prices between other lenders, and shop around for different vendors.

At the end of the day, if you can't afford your closing costs on top of your down payment, you can always fold it into your existing mortgage.

Are you wondering whether or not to get an enhanced insurance policyReach out with any questions or to get a quote!

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