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Do you know how closing costs factor into buying a house? Between saving for a down payment, applying for a mortgage and hunting for a house, the costs that come with closing on a home may be the furthest thing from a homebuyer’s mind. However, understanding what closing costs are and how to budget for them will make for a much smoother home buying process in the long run.

This video explains the typical closing costs and what you can expect to pay at closing. Some home closing costs may vary when you get an estimate from a loan officer, but other closing costs will be the same no matter who you go with. Find out how to understand your closing cost estimate in this video.

What are closing costs?

Closing costs represent all the fees that need to be settled at closing. There are two different types of fees included in your closing costs. The first are fees that you pay one time, at closing, to get your real estate transaction through, such as appraisal, credit report, title and escrow, flood determination and underwriting fees. Depending on the state you are in and the lender you are using, different fees may show up on this list. The second type of closing costs are recurring costs that you will continue to pay over the course of your homeownership, but a certain amount of them will need to be paid at closing. These items include homeowners insurance, interim interest, and property taxes.

How much are average home closing costs?

Typically, homebuyers can expect to pay a closing cost percentage between 2% to 5% of the purchase price or refinance amount of their home. For example, you might pay between $3,000 and $7,000 in closing costs for a home selling for $150,000. Your lender will provide a loan estimate which outlines what the closing costs will be, based on the loan you are applying for, within three days of receiving your loan application.

Certain closing costs may vary quite a bit from one loan estimate to another. Interim interest is one such fee, as it is comparable to pro-rated rent. From the day that you become the owner of the home to the end of that month, the lender oftentimes does not have time to bill you. Interim interest, then, is the interest that you would pay at closing from the day you become the homeowner to the end of the month, and then your first mortgage payment would typically be due on the first of the next month. 

How can you reduce mortgage closing costs?

While closing costs are not avoidable altogether, there are some things you can do to help mitigate the burden of those additional fees at closing.

  • Ask your mortgage advisor to help you understand each of the closing costs on your loan estimate. Knowing which fees are flexible and which are non-negotiable can help you to lessen fees wherever possible.
  • Ask your lender about programs that may be available to assist you with closing costs.
  • Roll closing costs into your loan so that you don’t have to come up with additional funds at closing. This will be less of a burden financially now, but it will increase your mortgage amount and monthly payments a bit, as well as increase the loan-to-value ratio.
  • Have the lender pay closing costs. Choosing this option saves you the extra funds now and does not increase your loan amount. These loans typically have a higher interest rate, which will mean higher monthly payments.
  • Negotiate with the seller to pay closing costs. Most loans allow sellers to contribute up to 6% of the sale price to the buyer as a closing cost credit. It’s a way to seal the deal—and a tax-deductible expense for the seller.

If you want to know more about how to use closing costs to shop for a loan and what you should look for in your loan estimate, see our next video on how to shop for a home loan. To apply for a home loan or to get pre-approved, please click here to complete an online application or click here to download our mobile app.

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