How to Avoid The Surprise of Closing Costs
Imagine this scenario: You’ve researched a new 4-wheeler and decided on the one you want. You go down to the dealership and purchase it for the price that was advertised. You’re feeling good, but suddenly, the dealer hits you with a 5% processing fee at the end of the transaction, now you’re over budget and not very happy.
Now let’s imagine the same scenario but for real estate transaction where a hidden fee or percentage could potentially cost you thousands. Where do many of these surprise fees come from? Closing costs. The bad news is surprise costs can irk your carefully planned budget, but the good news is they’re not very surprising if you do the proper research and ask the right questions. Let’s learn what to ask and review the right documents, so surprise closing costs don’t blindside you.
What are Closing Costs?
Closing costs are fees paid at the end or closing of a real estate transaction. They can run anywhere from 2 to 5 percent of the home purchase price. Usually these costs are used to pay various third-party professionals involved in a real estate transaction like lenders and attorneys. Because most of the fees are related to a new mortgage, the buyers typically absorb the brunt of closing costs.
Average fees for the buyers include loan processing fees, appraisal and inspection fees, and property taxes while sellers typically absorb closing costs for mortgage payoff fees, title transfer fees, and any attorney associated closing costs. Who pays what is negotiable, which we’ll get into later.
How to Learn Your Closing Costs
Only a bad real estate professional will try to hide closing costs. Before you ink any final deals or agreements read over all your documentation or have your agent examine them. Most of the time, all you need to do is ask what is expected of you regarding closing costs and you should get a straightforward answer.
Your agents might not always be able to give you the exact number until the end, but you should get an accurate number or percentage and where additional costs could happen. You want real numbers, and you want them explained to you. Never wait until you get to the table at the end of the transaction to find out about costs or you could find yourself out of much more cash than you expected.
Can You Lower Closings Costs?
You’ll receive a loan estimate from the lender after applying for your mortgage. The loan estimate summarizes all loan terms and details, including your interest rate and what you’re expected to pay at closing. Comparing these loans and estimates before you sign up will help you come out on top.
For mitigating the costs, turn to page 2 of your loan estimate, which details different necessary services and inspections you’ll need for closing. You can shop around these essential services including home inspectors and surveyors to find the best bang for your buck. Saving a hundred dollars on a few inspections and appraisals will add up to plenty of additional money in your pocket.
Can You Negotiate Closing Costs?
Closing costs are negotiable. If you’re looking for a little wiggle room or have been on the seller’s side during most of the transaction, make a move during closing to see if you can negotiate some back onto the seller. You can negotiate these costs directly into the purchase agreement but don’t rely on negotiating lower closing costs into your budget; they’re better looked at as a potential bonus and not surefire savings.
If you don’t immediately have all the cash handy for closing, many lenders offer the option of rolling your costs into your mortgage. This isn’t recommended since any additional money on your mortgage will accumulate interest. If you make the right moves, you’ll know what to expect in closing costs beforehand and pay cash for all costs to get them out of the way.
Closing It Out
A real estate transaction is both exciting and stressful, especially if you’re smacked with surprise closing costs. Surprise closing costs can add thousands to your budget, but with some homework and questions, you can make sure you’re ready for whatever the contract brings. Research places where you can lower costs before you go to the table and try negotiating lower closing costs to get the most out of your purchase. Closing costs are part of every major real estate transaction but be prepared, and you’ll walk into the home of your dreams with no surprises.