Closing Costs Explained

Written by Posted On Tuesday, 04 May 2021 12:43
What are closing costs What are closing costs

What Are Closing Costs When Buying A Home?


Ask anyone who has ever purchased or sold a home and they will tell you that closing costs are something that many first timers don’t expect.

What are closing costs when buying a house? These are costs that you will pay at the closing of the transaction. They can be either paid by the seller or paid by the buyer. If the buyer pays for the closing costs, they can be either included in the mortgage or paid up front. The thing about real estate, is that there will always be closing costs.  Your mortgage type as well as the closing costs will play a large role in the overall cost of your new home.


How Much Are Closing Costs?


“How much will my closing costs be?” That question seems simple enough, however, as you will learn, it is anything but simple. Closing costs can range from as little as $2000 for a small home and can exceed $20,000 for a larger, more expensive home. When it comes to real estate, closing costs are just one of the things that you will have to account for. You need to learn about these fees and know exactly what they are before you sign any documents.

Closing costs will include some of the following:

  • Application Fee
  • Closing Fee
  • Up-Front Mortgage Insurance Premium
  • Home Inspection
  • Homeowner's Insureance
  • Origination Fee
  • Points
  • Appraisal
  • Buyers Title Insurance
  • Junk Fees

Most of these fees will vary based on the size, location, and cost of the home. Some of these may even be negotiable. If you know what the closing costs will be before you buy the home, you can shop around for the best deal and not feel as though you are being taken advantage of.

Escrow


Another determining factor of how much your closing costs will depend on what time of the year you purchase your home. That’s due to your escrow account. Both homeowner’s insurance and property taxes are paid annually. Since most people cannot afford to come up with large sums of money all at once, they use escrow accounts. An escrow account is a third part service that acts as a savings account for your homeowner’s insurance and your property taxes. Other expenses are sometimes included, such as home owner association dues. So if you purchase your home towards the end of the year, then your taxes and insurance will soon be due. Therefore, you will have to make an upfront payment to account for the months earlier in the year in which you weren’t paying into your escrow account.

Junk Fees

What are Junk Fees?  Junk fees are a general term that is applied to any closing that are inflated or otherwise not needed.  Everyone in a real estate transaction deserves to get paid.  HUD has rules in place that make everyone disclose their charges and this is all shown in the Settlement Statement at closing.  You should receive that final document at least 3 days prior to your closing.  If anything looks out of the ordinary, dont hesitate to askt the title company, closing attorney, mortgage broker or your Realtor for an explanation of any charge showing on your settlement statement,

Financing Your Closing Costs


One disadvantage about rolling your closing costs into your mortgage payment will be interest. You will have to pay whatever interest rate you have received on those fees because they will become part of the total amount financed. So, if you have a 5% interest rate, on a 30 year mortgage, And $5,000 in closing costs, that will add $4,663. That means you will be nearly doubling your closing costs. Of course that will be spread over the 30 year term, which means that your additional monthly cost will be just $27. So you will have to decide whether or not an extra $27 per month is worth not having to come out of pocket $5,000 at closing.


Living in the Home


One factor that can help you decide whether or not to finance your closing costs with your mortgage payment will be how long you think you may live in the home. That’s because the only way you pay the full $4,663 in interest mentioned above is if you pay the mortgage over the full 30 years. If you sell the home in 5 years, for example, then you will only pay a fraction of that interest. Your financed closing costs will be paid off along with the rest of your mortgage when you sell your home to another buyer.
You can be sure that if you are planning on buying your first home, closing costs will definitely be something you need to figure out. The good new is that you will have your realtor and mortgage broker or banker to help you figure out which option is best for you. They will help you weigh your options and ensure that you make the best decision possible.

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Dean Cacioppo

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Dean has worked as a real estate agent, real estate instructor and has years of experience working on the technology side for major Real Estate Brokers, Agents and MLS’s.  Dean has sat on the Board of Directors for multiple MLS’s including being elected to President.  Years of serving on a number of MLS Committees for multiple boards, served on the Strategic Planning Committee for Louisiana REALTORS and participated in many task forces and committees for the benefit of all Real Estate Agents in Louisiana.

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