Understanding Loan Terms

How Much Should I Estimate For Closing Costs?

7 March 2016 by Gregory Hall

If you're buying a house, especially a first home, one of the major initial expenses is the amount you need to have at the closing for the so-called closing costs. This umbrella term includes the fee for running your credit report, doing a title search to make sure that there are no prior claims on the property, the fee for preparing the closing paperwork, any attorney fees, the property appraisal fee, the lender's underwriting fee, the county recording fee and the cost of title insurance. In most cases, you'll also be required to pay for the next period's property taxes as well as your first year's insurance payment if you're going to be paying for your homeowner's insurance as part of your mortgage payment.

How much show I set aside for closing costs?

HUD laws require that your lender give you an upfront estimate of your closing costs within three days of your applying for your home loan. However, if you are paying for a property outright, estimating the closing costs can be a little trickier. Many of the costs associated with a house sale are determined by the purchase price. Because of this, it's a good rule of thumb to set aside between two and five percent of the purchase price of your home for closing costs.

Do I have to pay all of the costs upfront?

In most cases, you will need to have money in hand for the closing costs when you arrive at the property closing. However, some types of loans, such as VA refinancing loans, allow you to roll the closing costs into the overall home loan. However, think carefully about whether you want to do this. Although financing the closing costs will require less money from you at the closing, you'll be paying interest on those costs for the entire term of your home loan. That will end up costing you a lot more over the course of the loan than if you paid the costs up front.

In some cases, especially if a property has been on the market for a number of months, the seller may be willing to pay some (or all) of the closing costs as an incentive for you to buy his or her house. It never hurts to ask when you are negotiating the terms of the purchase agreement.

Closing costs can be confusing. However, if you plan on saving an additional two to five percent of the purchase price in addition to your down payment or purchase amount, you'll have the money you need to complete your home buying transaction without any last minute worries. Talk to your mortgage company to learn more about the closing process.   

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