For many first-time homebuyers, closing costs can be an unexpected surprise. You might assume that your down payment is the only payment needed to secure your new home, but there are several additional fees to be aware of. Let’s break down what closing costs are, who they go to, and how much you can expect to pay.
What Are Closing Costs?
Closing costs are the fees and expenses you’ll need to cover when finalizing the purchase of a home. These costs typically fall into several categories:
- Lending Fees
- Points: If you choose to buy points to reduce your mortgage interest rate, you’ll pay these at closing.
- Underwriting Fees: Charged for evaluating your loan application.
- Processing Fees: Cover the cost of handling your paperwork.
- Appraisal Fees: Pay for an appraisal to ensure the property’s value matches your offer.
- Credit Report Fees: Covers the cost of pulling your credit report.
- Homeowners Insurance
- Your lender will require you to prepay a portion of your homeowners insurance. To avoid surprises, get a quote early, once you’re under contract and during the inspection period.
- Property Taxes
- You’ll need to set aside funds for property taxes. Don’t worry about overpaying—the title company will ensure that the previous owners cover their share.
- Title Fees
- Title insurance protects against any potential disputes over ownership. The premium is proportional to the home’s purchase price.
- Escrow Fees
- Escrow ensures that funds are handled appropriately during the transaction. While title and escrow services are often combined in Arizona, their fees are separate.
- Recording Fee
- This fee covers the cost of recording your deed with the county to officially document you as the new owner.
How Much Are Closing Costs?
Typically, closing costs range from 2% to 3% of the home’s purchase price. These fees are split between the lender, title company, and government agencies. On the other hand, if you’re paying cash for the home, expect this cost to be closer to 1% of the purchase price.
Example:
- For a home priced at $400,000, closing costs might be around $12,000 if you’re using a loan.
- If you’re paying in cash, the costs could be about $4,000.
Tips for Reducing Closing Costs
- Negotiate with the Seller: In some markets, you might be able to ask the seller to cover part of your closing costs. This can be advantageous for both parties: you get financial relief, and the seller may secure a deal more quickly.
- Shop Around: Compare fees from different lenders and title companies.
- Review Your Loan Estimate: Your lender is required to provide a loan estimate, so review it carefully and ask questions about any fees you don’t understand.
Understanding and planning your costs is crucial in the home-buying process. For more insights into the process of buying a home, check out my comprehensive guide here.
