So you’ve done all the hard work and saved a sizable down payment, and now you’re ready to buy your new home. Along with choosing a lender to secure a mortgage loan, you will also have to take into account closing costs, which can be considerable. See below for a full list of closing costs along with projected costs.
What Are Closing Costs?
Closing costs are miscellaneous fees directly related to purchasing your home, charged by lenders and third parties. They are due in cash at the time of sale, and the majority of closing costs are typically paid by the buyer, although that’s not always the case. One example is VA loans, where the home seller pays a portion of the closing costs.
Your lender will give you an estimate of closing costs on the purchase of a particular house you’ve selected. This is called a “Good Faith Estimate” (“GFE”). If they don’t give it to you, ask for it. Then, the day before the closing, ask your lender for the actual “Settlement Statement” (aka “the HUD” or “the HUD-1”), which is the final and complete form with all the numbers for the sale, including the actual closing costs.
What Charges Go Into Total Closing Costs?
Closing costs generally pay for the fees and services surrounding the sale of a home, including inspections, title and records keeping, commissions, and other fees. Some of the most common fees rolled into closing costs include:
- Appraisal Fees
- Inspection Fees
- Attorney Fees
- Title Service Costs
- Recording Fees, for entering official government records of ownership.
- Survey Fees, for surveying the lot and existing structures.
- Brokerage Commission
- Underwriting Fees, which cover the cost of evaluating a mortgage application.
- Home Warranties
- Pro-rata Fees, such as property taxes and insurance, interest, or homeowner association dues.
How Much Will You Pay In Typical Closing Costs?
Closing costs typically come in at 2-5% of the purchase price of your home, but that percentage can vary anywhere from 1% up to 7% or more. When you’ve selected a house, your lender will give you an estimate of closing costs, which is called a Good Faith Estimate. Again, this is only an estimate. You can request actual closing costs the day before closing, which are typically included in a Settlement Statement which lists all fees numbers for the sale. Closing costs are included in that Settlement Statement.
How Can Home Buyers Avoid Closing Costs?
Fortunately, home buyers can sometimes avoid paying closing costs. One way is to have the estimated closing costs rolled into your total mortgage loan. You can do this as long as you qualify for the larger loan, and as long as the increased loan doesn’t exceed the Loan-To-Value (LTV) ratio. Basically, the increased loan must not be too high compared with the value of the home. An LTV at or below 80% is typically acceptable.
Another option is obtaining a no-closing-cost mortgage. Generally, this means paying a higher interest rate in the long term in exchange for not paying closing costs up front. This option is best if you aren’t planning on living in your new home for more than 5 years, because then you haven’t paid significant costs up front just to turn around and move out a few years later.
Closing costs are a significant aspect of buying a new home. It is to your benefit to educate yourself so you know what to expect, and know what your options are. Now that you’ve done your homework on closing costs, it’s time to start searching for a home in Lexington, KY.