Closing Costs

If you’ve read our article on down payments, you may be familiar with the term “closing costs,” and how they play a role in down payments. But what are the closing costs? As the name suggests, they are costs associated with closing (buying or selling) a property. So, what are the costs? What are we actually paying for when we pay these fees?

Closing costs can range from 2% - 5%, on average, and are dependent on your loan’s value. As you can imagine, the more expensive the property, the more expensive the closing costs. These costs are due as soon as ownership of the property is transferred to another’s name.

Both the buyer and seller pay closing costs, but it can vary depending on which side you’re on. While they are negotiable, there are factors that can impact your costs. As we stated, the amount of the loan plays a part, but also things like location of the property and credit scores. In order to negotiate your closing costs, and possibly lower your payment, it’s imperative you do your due diligence. Don’t just accept the terms of the agreement before doing some of your own research.

First and foremost, know what you’re paying for and who should handle what. Buyers and sellers handle different costs. The buyer will pay things like the application fees, attorney fees, credit reports, prepaid interest, processing fees, etc. While the seller covers the realtor’s fees/commissions. Generally, the buyer will have higher closing costs, mostly due to the fact that they are the ones receiving a loan and there are more fees associated. All of these fees should be disclosed to you on your loan estimate form. This is where you need to do a proper analysis of all these costs. I always recommend running these numbers yourself before signing off on any forms. Remember, not every lender will give the same loan, so don’t be afraid to shop around. A different bank/lender may offer you a loan with less closing costs.

What if you have enough monthly income to cover your mortgage, but not enough to cover the closing costs? Remember, they’re due at the time of closing. Some lenders will give the option to roll your closing costs into your monthly mortgage payments. What actually happens is, they pay the closing costs for you and add that amount into your loan amount. Over time you will pay more, due to interest, but it may be an option if you don’t have the cash up front.

With all the fees and payments, it can get confusing. Don’t be afraid to negotiate and to shop around. You never know till you ask, right? Investing is a people business and the relationships you have can go a long way towards lowering some of your costs. For more tips, check out our website.

Areas of Review

Big picture takeaway points

Big picture takeaway points

Some closing costs are negotiable.
Ask questions if you do not understand something.
Investing is a people business.

Reflection

Self-reflection questions to think more about the content

Do I know who is paying what portion of the closing costs?
Have I shopped around? Closing agents and realtors are working for you.
Am I properly educated? Educate yourself enough so you're not left in the dark.

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