Closing Costs: A Primer
Many people are often blindsided by the “hidden” closing costs that come with buying or selling a home. Because of this, it is important to understand what closing costs are, how much they will be, and who is responsible for paying them. The following primer can help both buyers and sellers better understand closing costs.
What are closing costs?
Closing costs, sometimes known as settlement fees, are the accumulated charges that must be paid to for different professional services associated with buying or selling a home. The fees included in closing costs include the real estate commission, home inspection, escrow charge, title insurance premium, loan fee, pest inspection, and more. During the closing process you should be provided with a detailed list of the closing costs and fees.
How much are closing costs?
Individual closing costs vary from home to home. The amount due at closing is dependent on the price of the home and the services that were used during the buying and selling process. As a general rule, closing costs in California tend to equal about 10% of the total sales price of a home; if you are buying a home that costs $200,000, closing costs will be about $20,000. Your lender should provide you with a GFE, or Good Faith Estimate, before closing.
Who pays closing costs?
The responsibility of who pays closing costs is often covered in the real estate contract. While the sellers may pay a small portion of the closing costs, it is often the responsibility of the buyer to cover them. Some mortgages may include lowered closing costs; ask your lender directly for an estimate of what they will be.
What if I can’t afford my closing costs?
If you can’t afford to pay your closing costs in cash, you may be able to roll them into your mortgage. While this can be a good option for some families, it is important to keep in mind that this can increase your monthly mortgage payment. Likewise, financing closing costs may increase the interest rate on your loan; because of this, it is recommended to pay them in cash whenever possible.
Closing costs make up an important financial component of buying a home. Understanding closing costs can help you better prepare for the fees associated with closing on your new home.