What Are Closing Costs?
For many people, buying a home is one of the most significant purchases they will ever make. Whenever transactions on that scale occur, it's often more complex than the buyer handing money to the seller in exchange for an item. In almost every real estate transaction, a handful of parties are involved, such as the realtor, inspector, lender, etc. Each of these vendors charges fees for their service, adding additional expenses to the cost of the property. These additional real estate-related fees are called closing costs.
Whether you're buying or selling a property, you can expect to pay closing costs. Sellers typically cover fees like real estate commissions, often ranging from 3-6 percent. If you plan to sell your home or another property, factor this into your sale calculation. However, if you are a buyer, expect to cover the cost of items like appraisal fees, attorney fees, title insurance, and more. Keep in mind, as you review your contract, every real estate transaction is different, and the terms of your agreement will outline who will cover the cost of each line item.
What You're Paying For
As mentioned, closing costs are expected whenever you close a deal to buy a house or other property. Keep in mind that real estate closing costs can vary depending on the home's location. Below, we outline some of the most common costs you can expect for your real estate transaction:
Application Fees
Many buyers will initiate a mortgage through a lender when buying a home. Usually, this is a bank or a credit union. There are also private, non-bank mortgage lenders as well. Regardless of the lender you use, the process begins with an application, where your lender reviews your credit and other financial records. Because of this review process, the lending organization will sometimes charge an application fee to cover the credit check costs and administrative expenses. Remember, you are paying a fee to apply for the loan, which does not guarantee your application will be accepted. Most lenders will waive this fee if your application is denied.
Appraisal Fees
How do you know how much a home is actually worth? It may seem like a simple supply and demand equation where the value equals what a buyer is willing to pay. The supply and demand model will only give you the home's Fair Market Value; however, quite a few factors go into determining a house's objective worth. In a home appraisal, all property components are considered, including its location, the building itself, the age, the overall condition, and many other factors. Recent home sales of properties that are comparable to the one you are purchasing are also taken into consideration. A licensed real estate appraiser will complete the assessment and provide a detailed write-up of their findings.
Attorney Fees
Buying or selling a house is a legal transaction with lots of dollars involved, so it's no wonder that attorneys get involved. The sale of a home or other property requires an airtight contract so that no one can try to exploit loopholes in the system. The legal language needed to ensure this is why a licensed real estate attorney usually reviews the property transfer contract. This attorney will also help to facilitate the consummation and ensure you fully understand the details of your transaction. Your real estate attorney's fees will typically be a part of your closing costs.
State Taxes
Like buying a car, the state of Vermont is also interested in local real estate transactions. State transfer taxes are frequently a part of closing costs and differ from property taxes, which you'll also pay on your new home. The major difference is the transfer tax is a one-time fee at the time of sale, whereas you'll continue to pay property taxes as long as you own the home. The state transfer tax for a property is based on the purchase price of the home and determined by using a calculation based on the intended occupancy.
Escrow Fees
Many financial institutions offer an escrow service that involves adding a sufficient amount to your monthly loan payment to cover your property taxes and insurance premiums when they are due. Escrow fees vary among lenders, with some requiring them and others not. If you choose to include your property taxes and homeowner's insurance in your loan's escrow, your lender will collect a portion of the annual payment each month, making it convenient for you to handle all these expenses with a single check. However, it's important to note that funding the escrow will require additional funds at the closing. Typically, the initial month's escrow withholding is included in the closing costs. Once you begin paying off your mortgage loan, the escrow amount will be included in your monthly payment and adjusted accordingly if there is an increase in your property tax or insurance expenses, requiring a corresponding increase in escrow withholding.
Your sale may have other closing costs besides those we've mentioned above. These include origination fees, inspection fees, title fees, and more, depending on your location and the type of transaction.
How Much Will It All Cost?
While costs and fees vary quite a bit, you can expect to pay up to around 2-4 percent of the actual price of the home itself. To run a quick estimate, multiply the price of the house by .06. For example, if you have a home that costs $1,000,000, you should expect to pay between $20,000-$40,000 in closing costs and prepaid items.
That's a Lot: Can I Pay Less Than That?
Often, it is possible to reduce the closing costs on your home purchase. Many buyers can feel overwhelmed with the home purchasing process and overlook the breakdown of closing costs as they can seem complicated. However, it pays to look at the allocation of each fee and determine if there is a different path you want to take.
One way to avoid high fees from your lender is to find a local financial institution that can work with you for your needs. You can get your mortgage from a Credit Union like Vermont Federal Credit Union, which can often save you money on the final bill.
Still need help understanding what fees you will pay? Speak with a mortgage expert today and learn more about the costs of securing your dream home.
ABOUT VERMONT FEDERAL CREDIT UNION:
Vermont Federal Credit Union is a $900 million-plus full-service, not-for-profit, cooperative financial institution that has served Vermonters for more than 70 years, with eight locations currently serving over 50,000 members. Members are part of a cooperative, meaning they share ownership in the Credit Union and elect a volunteer board of directors. Vermont Federal Credit Union provides membership to anyone who lives, works, worships, or attends school in Vermont. Vermont Federal Credit Union is committed to supporting its communities and helping Vermonters prosper, no matter where they may be on life's journey. Learn more about Vermont Federal Credit Union.
