You should start preparing for the closing on your home as soon as you decide you’re ready to buy a house. You’ll want to save money because you’ll need cash for out-of-pocket expenses at closing. It’s also a good idea to have a brief understanding of what is involved in closing costs so that you won’t encounter any surprises along the way.
💲 What Are Closing Costs?
The process of buying a home involves closing on the property. If you’re like most people, you will secure a mortgage loan to buy that home. Once you’ve worked out all the details of the purchase contract and everyone agrees, it will be time to close on your new home. You need to be prepared for the closing costs associated with the purchase of your home. These are costs that you will be required to pay up front. Some closing costs may be rolled into your loan, but you should expect to have some out-of-pocket expenses.
📝 What Are Closing Costs Based On?
There are many factors that affect the amount of closing costs you must pay. For instance, you might have to pay a down payment from three to 20 percent of the purchase price. The down payment will be determined by the type of mortgage loan you obtain and the purchase price of the home. Other factors that can affect your closing costs include:
- Property taxes
- Homeowner’s insurance
- Escrow fees
Your lender will provide you with a Good Faith Estimate (GFE) so that you will have a clear idea of what will be expected of you at closing. This allows you to prepare and set aside money for the closing costs, so you are not caught off guard and short on cash.
💵 What Are Typical Closing Costs for Buyers?
Closing costs consist of many components. Some costs are the responsibility of the seller, while other costs are going to be your responsibility, as the buyer. Typical buyer closing costs can include, but are not limited to:
- Application Fee: This fee covers the cost of processing your application. It can also include the cost of pulling your credit report. Not all lenders charge this fee and it’s possible that this cost can be negotiated.
- Appraisal: You’ll need to pay a third party for an appraisal to determine the fair market value of your home. Your lender will require the appraisal to ensure your home is worth the amount of the loan.
- Attorney Fee: If you ask an attorney to review the closing documents, you will need to pay their fee.
- Escrow Fee: When you close, there will be either an escrow company, title company or an attorney overseeing and conducting the closing. The escrow fee covers these services.
- Escrow Deposit: When you close, you may be required to pay your property taxes and mortgage insurance up to 12 months in advance. The money you pay will be deposited in an escrow account to be disbursed when such items are due.
- Home Inspection: You may want to order a home inspection to ensure the property is in proper order and to identify any repairs that should be made before closing. You’ll pay a fee to a third party for this service.
- Mortgage Points: If you want a lower interest rate, you can buy down your interest rate by paying the lender a percentage of your loan amount.
- Homeowner’s Insurance: You will be required to purchase homeowner’s insurance and you may be required to pay the first year in advance.
- Title Insurance: You’ll want to purchase title insurance to protect you if someone makes a claim against your property.
- Pest Inspection: Some states require a pest inspection for government loans. The home will be inspected for pests and dry rot.
💰 What Closing Costs Are Tax Deductible?
Closing costs generally are not tax-deductible. There are, however, some exceptions. The following closing costs are tax-deductible:
- Any prepayments for mortgage interest
- Prorated property taxes
- Mortgage points
Closing costs can be confusing so it’s best to gain an understanding of what will be expected of you. The last thing you want is to find out you need cash for closing costs only to realize you don’t have it. If you’re unprepared to deal with the closing costs, this could delay your closing or could prevent you from closing altogether. Therefore, you must know what you will be required to pay right from the start. This will allow you to save the money you need and help you avoid surprises.
Your real estate agent is the best source of information about the local community and real estate topics. Give K Tompkins Real Estate Group a call today at 770-843-8184 to learn more about local areas, discuss selling a house, or tour available homes for sale.