Buying a new home is almost always a financial strain. Most people want to get the best place they can, and really stretch themselves to find the money, knowing that as well as the loan itself they will have to pay for moving costs and probably some renovations. This means that having to keep money aside for closing costs, and not knowing quite what they’ll amount to, can be a real source of frustration. What are closing costs and how should you prepare to meet them?
What closing costs cover
The full breakdown of costs associated with finalizing your contract is complicated, and what is included in closing costs can differ based on the location of the property you’re buying. In 20 states, you need a lawyer to finalize the buying contract, which means lawyers’ fees are added into the mix – in the others, this is optional (though generally a good idea). Wherever you are, you will need to pay an origination fee for your loan, the cost of obtaining your credit report and processing your application, and mortgage insurance. You will need to cover the cost of title searches on the property, appraisal, loan discount points and recording fees.
Finding out your closing costs
Shortly after you first present your loan application, you should be sent an estimate that includes a breakdown of your expected closing fees. You should then receive a disclosure statement, three days before closing, which lists your actual closing costs. They usually add between 3% and 6% to the overall cost of your loan.
Prorations
These are the costs, to be settled between buyer and seller, which relate to ongoing payments associated with the property. For instance, if the seller has already paid factors’ fees for the whole month and you move in halfway through, you will owe the seller half the month’s fees. If you then receive a retrospective electricity bill for the month, the seller will owe you half of that.
Taxes and warranty
Property taxes and warranty will usually need to be paid upfront before you gain access to your new home, though you may get some of this money back on a proration basis. It’s always worth talking to the seller directly to negotiate a way of handling this that suits you both.
No-closing low cost mortgages
There’s just one way to avoid paying upfront closing costs, and that’s to take out a no-closing low cost mortgage. While this may seem like an obvious win, however, what it means in practice is simply that closing costs are covered by your lender and added to the amount you will have to pay off over time as part of your mortgage. Since you’ll be paying interest on this, the upshot is that it will cost you more in total.
If you’re struggling to meet closing costs, ask your bank about a loan. What’s available will depend on your income and how much you’re already paying in instalments to cover your home loan, but it’s always better to discuss your options upfront than simply fail to pay. One way or another, you’ll soon be able to deal with these costs and relax and enjoy your new home.
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