Closing Costs: What You Need To Know
When it comes to saving money to buy or refinance a home, youve probably been pretty focused on the down payment. But youll also need to plan for closing costs, which are due on closing day.
Understanding what closing costs are, how much they cost on average and whats included can help eliminate any unexpected last-minute financial obstacles when you close on your new home.
Options For Paying Loan Closing Costs
Closing costs can quickly add up when you buy a house, usually running between 3% and 4% of the purchase price. For example, if youre buying a property with an $80,000 mortgage, your total closing costs would be between $2,400 and $3,200.
While you can pay your closing costs out-of-pocket, there are also other options to use to pay loan closing costs that allow you to keep more cash on hand:
- Personal funds to pay closing costs
- Lender credit to pay some or all of the costs
- Seller credit can be negotiated as part of the purchase contract to pay for closing costs
In addition to these three choices, the fourth option is to include closing costs and loan fees in the mortgage balance, then pay them off as part of your monthly mortgage payment. Next, lets take a detailed look at how and why investors include closing costs in a loan.
Recording Fees And Transfer Taxes
Local or county governments charge fees whenever a property changes hands. The seller is usually responsible for covering transfer taxes and recording fees. Sellers may have to pay fees to the county government, state government, both or neither it all depends on your state.
Transfer taxes are usually expressed as a set number of dollars per $100,000 of the homes appraised value.
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Rolling Closing Costs Into The Irrrl
The most popular loan here at Low VA Rates is the Interest Rate Reduction Refinance Loan, or IRRRL. With an IRRRL, the VA allows borrowers to roll every single closing cost into the loan balance. Heres how it works:
Lets say youve got $5000 in closing costs. If your loan amount is $100,000 at the time of refinance, and you want to roll your closing costs, youll borrow $105,000 in total. That way, the $5,000 in closing costs will be paid through monthly mortgage payments just like the rest of the loan. Youll also be doing this at a lower interest rate, and your payment could still go down, even though your balance is increasing.
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Rolling Closing Costs When You Refinance
If youre refinancing an existing home loan, its often possible to include closing costs in the loan amount.
As long as rolling the costs into your mortgage doesnt impact your debttoincome or loantovalue ratios too much, you should be able to do it.
- As an example, lets say your new loan amount is $200,000, excluding closing costs
- If your home is valued at $250,000, your LTV is 80%.
- If your maximum approval is 80% LTV, or youre just wanting to stay at or below the 80% mark in order to avoid paying private mortgage insurance , you may not be able to roll the closing costs back into your loan
But if your loantovalue ratio is low enough, taking on a small extra loan amount might not make too much of a difference.
Do Realtor Fees Come Out Of Pocket
Realtor fees also known as commission are part of almost every real estate transaction. Even though buyers don’t have to pay realtor fees, they’re still on the hook for some major out-of-pocket expenses the down payment and in some cases, earnest money. They’ll also usually have closing costs they have to cover.
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Are There Other Ways To Get A Low
If youre thinking that a no-closing-cost mortgage isnt the right option for you, there are other ways to save on the upfront costs to make sure you get a low-closing-cost mortgage.
You can try negotiating with your lender, as some fees can be either waived or reduced. Talking with your lender can give you a better idea on your options, and you might find a way to reduce upfront costs. Many cities and states also offer first-time home buyer programs to help assist with down payments and closing costs.
Another option is to ask the seller to cover the closing costs for you. Depending on the situation, some sellers may agree to help by covering some of the closing cost.
Which Closing Costs Cannot Be Rolled Into An Fha Loan
There are some closing costs which cannot be rolled into the loan. These costs include all of the prepaid fees at closing such as your prepaid interest, prepaid taxes, homeowners insurance premium, interest owed at closing, and your escrows for taxes and insurance.
Your lender can provide you with a good faith estimate which should outline all of these costs for you. It is important to note that the lender does not generate these costs, but instead they are the messenger. You will negotiate your homeowners insurance with your agent, your taxes are determined by your township and the prepaid interest will depend upon which day of the month you close.
You can see that the majority of the FHA closing costs can be financed. Especially those big ticket items such as the mortgage insurance premiums
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Can I Use Credit Card For Closing Costs
So, the answer is yes, as long as you have assets to cover the amount you put on the credit card or have a low enough Debt to Income Ratio, so that adding a higher payment based on the new balance of the credit card wont put you over the 50% max threshold.
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Why is my closing costs so high?
So, in most cases, sellers pay as much and maybe more than buyers. Closing costs are paid in cash at the time of closing. Youll pay higher closing costs if you choose to buy discount points and also referred to as prepaid interest points or mortgage points, but the trade-off is a lower interest rate on your loan.
What do closing costs include? Closing costs are the expenses over and above the propertys price that buyers and sellers usually incur to complete a real estate transaction. Those costs may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges.
How To Lower Closing Costs
The less you have to spend on closing costs, the smaller the check youll have to write outor the less youll add to your mortgage balance. Thats why its wise to keep your closing costs to a minimum. You can do so by seeing if the seller will pay some or all of your closing costs.
In a normal housing market, its not uncommon for sellers to be asked to pick up some or all of a buyers closing costs. Sellers often are willing to do so if they want to solidify the offer theyve received. But this strategy may not work right now because its a sellers market.
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Prorated Real Estate Taxes
When someone sells a property, theyre usually required to pay the real estate taxes for the portion of the year for which theyve held the property. This is because the buyer will pay the real estate taxes for the full year when they get their property tax bill at the next billing cycle. The seller is simply crediting back the real estate taxes due for the portion of the year they owned the property.
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Closing Costs Vs Down Payment
People often assume that their down payment covers closing costs. Though you may make your down payment at closing, these are two completely different payments.
Your down payment is paid to the seller of the house closing costs are paid to the lender, real estate attorney, title company, and other third parties involved in your real estate transaction.
What you put down on the house goes towards the overall purchase price. For example, if you put $60,000 down on a $300,000 home, youâll only need to finance $240,000. Closing costs, on the other hand, are not included in the purchase price of the home. They are an additional amount that must be paid in full upfront.
Can Closing Costs Be Included In The Loan
If you dont have the cash to pay closing costs upfront, you might be able to include them in your loan balance.
This is often allowed on refinance loans, though unfortunately its not an option for home buyers.
This strategy will cost more in the long run since you end up paying interest on your closing costs. It will also raise your interest rate. But it might be a good option if you dont have the upfront cash needed to refinance.
At todays low rates, many homeowners can include their closing costs in the loan and still walk away with a good deal.
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How Much Are Closing Costs For A Buyer
Not every buyer will pay the same amount in closing costs. Some costs are lender requirements, some are government requirements and others may be optional will vary depending on the situation. What youll need to pay for will depend on where you live, your specific lender and what type of loan you take.
At least 3 days before you attend your closing meeting, your lender will give you a document called your Closing Disclosure. This will list out every closing cost you need to cover and how much you owe. Here are some of the most common closing costs you might see on your disclosure.
The Cost To Refinance A Mortgage
Refinancing isnt free youll have to pay closing costs but there are ways you can pay less for your new loan.
Edited byChris JenningsUpdated November 29, 2021
Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”
Refinancing your mortgage can help you save money in the long run, as well as lower your monthly payment. However, before you move forward, its important to consider the costs of refinancing and how to avoid or lower some of these fees.
Heres a closer look at the cost to refinance a home loan:
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How To Reduce Or Avoid Closing Costs
When youve spent months or even years saving for a down payment, searching for a property, negotiating a purchase price, going through due diligence and securing financing, paying closing costs can be an unwanted surpriseand they can make it that much harder to afford your new property.
With that in mind, a lot of people want to try to reduce or avoid closing costs. While its impossible to eliminate closing costs entirely, there are some things you can do to reduce your expenses, including:
Additionally, certain closing costs can sometimes be added to a buyers loan amount, rather than paying it in cash at closing. What costs can be rolled into your loan vary by lender, but may include origination fees, appraisal and inspection fees or title fees. While this can lead to some initial cost savings, it will actually increase the total mortgage cost, as youll pay interest on these expenses over the life of the loan.
How To Estimate Closing Costs
Once you submit a mortgage application, your lender is required by law to give you a Loan Estimate within a few days. If you have questions or something doesnt add up in your LE, ask your lender or attorney right away. You want to avoid surprises.
Prior to closing your loan, youll receive your final Closing Disclosure listing your closing costs. Be sure to compare your Closing Disclosure to the LE you received when you applied for your loan. Generally, youll be asked to pay via cashiers check.
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Should You Pay Closing Costs Up Front
The upside of writing a check for your closing costs when you finalize your mortgage is that you don’t have to take on more debt when you buy a home. If you roll your closing costs into your loan, you pay interest on them. Pay them up front, and you don’t, which keeps your monthly payment lower.
On the other hand, if money is tight and you’re already spending a lot of your savings on a down payment, you may be better off rolling closing costs into your loan. Also, if you’ve managed to secure a low interest rate on your mortgage, it may not hurt to just lob an extra few thousand dollars into your home loan.
The Downsides Of Rolling Closing Costs Into Your Mortgage Refinance Loan
When you roll your closing costs into your mortgage refinance loan, you’ll have to pay interest on that money the entire time you’re paying off your home loan. This can actually make these fees more expensive.
Consider the difference between that $200,000 loan and the $206,000 loan mentioned above. If you took out a 30-year $200,000 loan at 3.25%, your monthly payment would be $870 and your total interest costs would be $113,428 over the life of the loan. But if you borrowed $206,000 because you tacked on closing costs, monthly payments would be $897 and you’d pay $116,831 in total interest over the life of the loan. Instead of paying $6,000 up front, you’d pay an extra $27 per month every month for three decades. That means you’d end up spending about $9,700 on closing costs and the interest paid on them.
Increasing the amount you borrow and your monthly payment could also make loan approval more difficult. That could be an especially big issue if you’re close to exceeding your lender’s allowable debt-to-income ratio or if you’re refinancing a loan with a balance close to 80% of your home’s current value.
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Can I Use A Credit Card To Pay Closing Costs
So, the answer is yes, as long as you have assets to cover the amount you put on the credit card or have a low enough Debt to Income Ratio, so that adding a higher payment based on the new balance of the credit card wont put you over the 50% max threshold.
Is Conventional better than FHA? FHA loans allow lower credit scores than conventional mortgages do, and are easier to qualify for. Conventional loans allow slightly lower down payments. FHA loans are insured by the Federal Housing Administration, and conventional mortgages arent insured by a federal agency.
Do FHA loans get denied?
Reasons for an FHA Rejection
There are three popular reasons you have been denied for an FHA loanbad credit, high debt-to-income ratio, and overall insufficient money to cover the down payment and closing costs.
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How Can I Avoid Closing Costs
How to avoid closing costs
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