Home Buyers Closing Costs: The Ultimate Guide
Future homebuyers are certainly aware they’ll need to have some sort of a down payment when obtaining a home loan.
Unless they’re VA eligible or buying a qualifying property in a rural area using a USDA mortgage, there will need to be a down payment.
Depending upon the type of loan, these down payments can range anywhere from 3.5% down and up. When planning a future purchase, buyers identify how much they’ll need for a down payment and begin a savings plan.
But don’t forget about closing costs, too. When lenders approve a mortgage loan application they also need supporting documents from multiple sources in order to make the loan compliant with a host of rules and regulations as well as making sure the property changes hands legally from the seller to the buyer.
What types of home buyers closing costs can you expect?
There are two types of closing costs, recurring and non-recurring. Let’s take a look at recurring charges first.
Recurring Closing Costs
A recurring closing cost simply means the borrowers will encounter these fees over and over again as long as they own the home and keep the mortgage. Mortgage interest is a recurring cost and is included with the monthly mortgage payment.
Yet mortgage interest is paid in arrears and in that manner is the opposite of rental payments. When you pay the rent on the first of every month you’re paying for the next 30 days until the first of the next month. With mortgage interest when you make your payment you’re paying for the previous month, not the upcoming.
Now let’s say you’re closing on the 20th of the month on your first home. Your lender will collect interest from the 20th up until the first of the upcoming month. This is called prepaid interest and is essentially your first mortgage payment. Because the lender has collected your first payment at the settlement table, it will seem as if you’re skipping a payment when in reality you’ve already made it. If you close on the last day of the month the lender will only collect one day of interest.
When refinancing you will pay accrued interest as well as prepaid interest. Because interest accrues daily, when the old mortgage is paid off there is still the interest owed to the lender. If your refinance funds on the 20th of the month, the old lender will collect 20 days of accrued interest and your new lender will collect 10 days of prepaid interest.
Property taxes are also a recurring closing cost as is property insurance.
When you impound for taxes and insurance, lenders can collect up to two months of property insurance to set up the impound account and up to five months for property taxes, depending upon what time of year you’re closing.
Non-Recurring For Home Buyers Closing Costs
Non-recurring costs mean you’ll pay them only one time. With the exception perhaps of your property appraisal charge, most of these fees will be settled at your closing. In this group of non-recurring charges, they will either be lender fees or non-lender fees.
Lenders have control over their own fees but do not have control over third party charges. When requesting a closing cost estimate from a lender, the lender fees will be correct and at the same time the lender is required to make a good faith estimate regarding third party charges. Lenders are held to a pretty strict standard when issuing a cost estimate.
If the lender quotes a lender charge of say $400 for loan processing and it ends up being $450, the lender is responsible for the difference, not you.
If there are any third party costs your lender requires you to pay and you have no choice over the particular company providing that service, if the charges are different at the closing table by more than 10% from the original quote, the lender is then responsible for the difference.
Typical non-recurring fees are for things like an appraisal, credit report, title insurance and escrow charges among others.
Do You Have to Pay Them?
Okay, so you just got your cost estimate from your loan officer and you see there are about $4,000 in various closing costs. Those fees do have to be paid or your loan can’t close. But you don’t necessarily have to be the one that pays them.
The seller can pay some or all your fees up to a certain point. That’s part of your original negotiations when your agent makes your initial offer and counteroffers. The seller may not be inclined to pay your fees but it’s certainly allowable. Your lender can also pay your closing costs for you in the form of a lender credit.
Think for a second about how you can pay a discount point to lower the interest rate on a loan. For example, if you get a quote from a lender on 30 year loan at say 4.00% without a point and 3.75% with one point, you’re paying one percent of your loan amount in exchange for a lower rate.
Conversely, if you increase your rate from 4.00% to 4.25% the lender then has that same point that can be applied toward your closing costs.
The costs don’t disappear, they still need to be paid, only the entity that pays them is the lender. In exchange you agree to the higher rate.
What About Combining Work For Home Buyers Closing Costs?
And of course any combination can work. You can pay say $1,000 in charges, the seller agrees to pay $1,000 and the lender adjusts your interest rate up by 0.125% and provides a lender credit.
Coming up with a down payment probably gets the most attention when future homeowners begin thinking about financing, and rightly so.
Conventional loans without mortgage insurance might mean a down payment of $40,000 on a $200,000 sales price while closing costs on a purchase of that amount might be closer to say $6,000.
Still, closing costs must be paid so make sure you’re not only aware of them but also prepare for them.