What Are Closing Costs? Explained

What are closing costs? Whether you are buying a new home or refinancing your current home loan, there are closing costs associated whenever you close on a home loan.  What are Closing Costs? Closing costs vary from state to state, county to county, city to city.  There are states where closing costs are much more than others.  For example, closing costs in general are much higher in the state of Florida than the state of Illinois.  Some states not only charge transfer stamps but also intangible taxes as well and the more the loan amount is, the more the state taxes are.  Whether it is a home purchase loan, a FHA streamline loan, a refinance mortgage loan, or cash out refinance mortgage loan, you will have closing costs on any new mortgage closing transaction.

What Are Closing Costs?

What are Closing Costs? Closing costs are the costs and fees that a home buyer or homeowner pays at closing when they buy their new home or refinance their current home loan to a new mortgage loan.  Closing costs are fees and costs that are charged by mortgage lenders and all third party vendors such as title companies, attorneys, insurance, and government agencies. A home closing is when the title to the property is transferred from the home seller to the home buyer or when the current homeowner transfers their mortgage loan to another mortgage lender on a refinance mortgage transaction. On a home purchase transaction, there are fees and costs that the home buyer is responsible for and the seller is responsible for.  On a home refinance mortgage loan transaction, the homeowner is responsible for all closing costs.  On a home purchase transaction, the home buyer needs to come up with the down payment of the home purchase plus the closing costs.

What Is Included In Closing Costs?

As mentioned earlier, it is rather difficult to determine an exact amount the home buyer or homeowner needs to come up with closing costs.  It is not like coming up with a down payment on a home purchase such as FHA requiring 3.5% down payment on a home purchase and Conventional Loans requiring 5% on down payment on a home purchase.  Closing costs vary anywhere between 2% to 6% on the value of the home.  The big range of closing costs is because every city, county, state the property is located has different fees and costs.  Closing costs also depends on property type.  Condominium purchases have higher closing costs than single family home purchases.  Examples of closing costs includes origination fees, credit report fees, underwriting fees, processing fees, appraisal fees, home inspection fees, survey costs and fees, title insurance costs, title search fees, pre-paids where escrows needs to be set up, pest and termite inspection fees, attorney’s fees, and government recording fees.

How Much In Closing Costs Would You Pay?

Your mortgage loan originator can give you a rough estimate on how much your closing costs will be.  Closing costs will range anywhere between 2% to 6% depending on the state the property is located.  On a smaller loan amount, you can expect the 6% range where on a larger loan amount the closing costs will be more towards the 2% range.  For Example, closing costs on a $100,000 home purchase may be $5,000 or 5% whereas closing costs on a $500,000 may be $10,000 or 2% of the home purchase price.

What If I Cannot Come Up With Closing Costs?

Many first time home buyers are limited with coming up with their down payment on their home purchase.  FHA Loans require 3.5% down payment on a home purchase.  Conventional Loans require either 3% down payment for first time home buyers and 5% down payment for seasoned home buyers.  Most home buyers do not have to worry about coming out of pocket for closing costs because most home sellers will give home buyers a sellers concession towards a home buyers closing costs.  If the seller is not willing to give a sellers concession, then the mortgage lender can give the home buyer a lender’s credit towards the borrowers closing costs.

How Does Sellers Concessions And Lenders Credit Work?

A sellers concession towards a home buyers closing costs is when a home seller offers to pay for part or all of the home buyers closing costs.  Why would a home seller do that?  If a home seller wants an net bottom price of $100,000 for their home, the seller can inflate the purchase price to $104,000 and give the home buyer a $4,000 sellers concession.  The home buyer can use all of the sellers concessions on closing costs only and cannot use it towards the down payment.  Any overage in sellers concessions needs to go back to the home seller so make sure that you do not get too much sellers concessions where it is wasted.  The overage sellers concessions cannot be given to the home buyer in the form of cash or any other type of value.  In the event if a home seller cannot or is not willing to give a sellers concession, the home buyer can get a lenders credit towards closing costs where for a higher mortgage rate, the mortgage lender can cover the home buyers closing costs.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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