Some Highlights
If you’re thinking about buying a home, be sure to plan for closing costs.
Closing costs are typically 2% to 5% of the total purchase price of a home, and they can include things like government recording costs, appraisal fees, and more.
Work with a local real estate expert who can answer your questions about the homebuying process.
Before you buy a home, it’s important to plan ahead. While most buyers consider how much they need to save for a down payment, many are surprised by the closing costs they have to pay. To ensure you aren’t caught off guard when it’s time to close on your home, you need to understand what closing costs are and how much you should budget for.
What Are Closing Costs?
People are sometimes surprised by closing costs because they don’t know what they are. According to Bankrate:
“Closing costs are the fees and expenses you must pay before becoming the legal owner of a house, condo or townhome . . . Closing costs vary depending on the purchase price of the home and how it’s being financed . . .”
In other words, your closing costs are a collection of fees and payments involved with your transaction. According to Freddie Mac, while they can vary by location and situation, closing costs typically include:
Government recording costs
Appraisal fees
Credit report fees
Lender origination fees
Title services
Tax service fees
Survey fees
Attorney fees
Underwriting Fees
How Much Will You Need To Budget for Closing Costs?
Understanding what closing costs include is important, but knowing what you’ll need to budget to cover them is critical, too. According to the Freddie Mac article mentioned above, the costs to close are typically between 2% and 5% of the total purchase price of your home. With that in mind, here’s how you can get an idea of what you’ll need to cover your closing costs.
Let’s say you find a home you want to purchase for the median price of $366,900. Based on the 2-5% Freddie Mac estimate, your closing fees could be between roughly $7,500 and $18,500.
Keep in mind, if you’re in the market for a home above or below this price range, your closing costs will be higher or lower.
What’s the Best Way To Make Sure You’re Prepared at Closing Time?
Freddie Mac provides great advice for homebuyers, saying:
“As you start your homebuying journey, take the time to get a sense of all costs involved – from your down payment to closing costs.”
Work with a team of trusted real estate professionals to understand exactly how much you’ll need to budget for closing costs. An agent can help connect you with a lender, and together your expert team can answer any questions you might have.
Bottom Line
It’s important to plan for the fees and payments you’ll be responsible for at closing.
Work with a local real estate professional who can help you feel confident throughout the process.
When it comes to buying a home, it can feel a bit intimidating to know how much you need to save and where to find that information. But you should know, you’re not expected to have all the answers yourself. There are many trusted professionals who can help you understand your finances and what you’ll need to budget for throughout the process.
To get you started, here are a few things experts say you should plan for along the way.
1. Down Payment
As you set your savings goal for your purchase, your down payment is likely already top of mind. And, like many other people, you may believe you need to set aside 20% of the home’s purchase price for that down payment – but that’s not always the case. The National Association of Realtors (NAR) says:
“One of the biggest misconceptions among housing consumers is what the typical down payment is and what amount is needed to enter homeownership. Having this knowledge is critical to know what to save . . .”
The good news is, you may be able to put as little as 3.5% (or even 0%) down in some situations. To understand your options, partner with a trusted professional who can go over the various loan types, down payment assistance programs, and what each one requires.
2. Earnest Money Deposit
Another item you may want to plan for is an earnest money deposit. While it isn’t required, it’s common in today’s highly competitive market because it can help your offer stand out in a bidding war.
So, what is it? It’s money you pay as a show of good faith when you make an offer on a house. This deposit works like a credit. You’re using some of the money you already saved for your purchase to show the seller you’re committed and serious about their house. It’s not an added expense, it’s just paying some of that up front. First American explains what it is and how it works:
“The deposit made from the buyer to the seller when submitting an offer. This deposit is typically held in trust by a third party and is intended to show the seller you are serious about purchasing their home. Upon closing the money will generally be applied to your down payment or closing costs.”
In other words, an earnest money deposit could be the very first check you’ll write toward your purchase. The amount varies by state and situation. Realtor.com elaborates:
“The amount you’ll deposit as earnest money will depend on factors such as policies and limitations in your state, the current market, what your real estate agent recommends, and what the seller requires. On average, however, you can expect to hand over 1% to 2% of the total home purchase price.”
Work with a real estate advisor to understand any requirements in your local area and what they’ve recommended for other buyers in your market. They’ll help you determine if it’s something that could be a useful option for you.
3. Closing Costs
The next thing to plan for is your closing costs. The Federal Trade Commission (FTC) defines closing costs as:
“The upfront fees charged in connection with a mortgage loan transaction. …generally including, but not limited to a loan origination fee, title examination and insurance, survey, attorney’s fee, and prepaid items, such as escrow deposits for taxes and insurance.”
Basically, your closing costs cover the fees for various people and services involved in your transaction. NAR has this to say about how much to budget for:
“A home costs more than just the sale price. For example, closing costs—which make up about 2% to 5% of the home’s purchase price—are a major added expense…Lenders provide a Closing Disclosure at least three business days prior to closing on a mortgage. But buyers will need to budget for these added costs ahead of time to avoid sticker shock days before closing.”
The key takeaway is savvy buyers plan ahead for these expenses so they can come into the process prepared. Freddie Mac sums it up like this:
“If you’re in the market to buy a home, your down payment is probably top of mind. And rightly so – it’s likely the biggest cost of homebuying. However, it is not the only cost and it’s critical you understand all your expenses before diving in. The more prepared you are for your down payment, closing and other costs, the smoother your homebuying journey will be.”
Bottom Line
Knowing what to budget for in the homebuying process is essential.
To make sure you understand these and any other expenses that may come up, partner with a real estate advisor for expertise on what to expect when you buy a home.
As a homebuyer, it’s important to plan and budget for the expenses you’ll encounter when you purchase a home. While most people understand the need to save for a down payment, a recent survey found 41% of homebuyers were surprised by their closing costs. Here’s some information to help you get started so you’re not caught off guard when it’s time to close on your home.
What Are Closing Costs?
One possible reason some people are surprised by closing costs may be because they don’t know what they are or what they cover. According to U.S. News and World Report:
“Closing costs encompass a variety of expenses above your property’s purchase price. They include things like lender fees, title insurance, government processing fees, upfront tax payments and homeowners insurance.”
In other words, your closing costs are a collection of fees and payments made to a variety of individuals and organizations who are involved with your transaction. According to Freddie Mac, while they can vary by location and situation, closing costs typically include:
Government recording costs
Appraisal fees
Credit report fees
Lender origination fees
Title services
Tax service fees
Survey fees
Attorney fees
Underwriting Fees
How Much Will You Need To Budget for Closing Costs?
Understanding what closing costs include is important, but knowing what you’ll need to budget to cover them is critical to achieving your homebuying goals. According to the Freddie Mac article mentioned above, the costs to close are typically between 2% and 5% of the total purchase price of your home. With that in mind, here’s how you can get an idea of what you’ll need to cover your closing costs.
Let’s say you find a home you want to purchase for the median price of $350,300. Based on the 2-5% Freddie Mac estimate, your closing fees could be between roughly $7,000 and $17,500.
Keep in mind, if you’re in the market for a home above or below this price range, your closing costs will be higher or lower.
What’s the Best Way To Make Sure You’re Prepared at Closing Time?
Freddie Mac provides great advice for homebuyers, saying:
“As you start your homebuying journey, take the time to get a sense of all costs involved – from your down payment to closing costs.”
The best way to understand what you’ll need at the closing table is to work with a team of trusted real estate professionals. An agent can help connect you with a lender, and together they can provide you with answers to the questions you might have.
Bottom Line
In today’s real estate market, it’s more important than ever to make sure your budget includes any fees and payments due at closing.
Work with a local real estate professional to be sure you have the knowledge you need to be confident going into the homebuying process.