During the course of buying a home, multiple entities provided services on your behalf. This includes the title company, appraisers, mortgage lenders, and other real estate-related professionals. They don’t do this work for free, and their compensation comes by way of a lump sum payment referred to as closing costs.
We’ve heard story after story about first-time homebuyers taken unawares and having to beg and borrow from family and friends to come up with their closing costs when they came to the doc signing table. Don’t let that happen to you!
Buyers Beware: Budget for Closing Costs
If your agent does not prepare you, it’s a shocker to find that you owe an extra three to five percent (3% to 6%) above the agreed-upon sales price. Here is what you need to know and what to expect, so closing costs don’t take away from the joy of purchasing your new home.
What Do Closing Costs Cover?
When you’re buying a home, it may feel like you’re only doing business with your real estate agent, the sellers, and the seller’s agent. But, in fact, there is a range of professionals who’ve performed services to support the sale and purchase of your new home.
Appraisal and survey fees
Your home is an investment. If you’re using a loan to make the purchase, your lender needs to know their investment in you is worth it. To do this, they use appraisers and surveys to assess the home’s actual market value.
Lenders want to make sure they can recoup their money if buyers default on the loan and the home has to be resold. The costs for these services usually run several hundred dollars.
Loan origination and other mortgage-related fees
These fees cover the costs for the lending agents and underwriters who completed and reviewed loan documents at every stage of the journey. Other fees associated with your lender include:
- Credit checks: Your credit is run at the beginning of the road to ensure you qualify in the first place, and there are small fees for that.
- Mortgage points. Mortgage points are paid directly to your lender to reduce interest rates. Mortgage points are used as incentives, so you’ll use a particular lender or reward you for excellent credit scores.
- Rate lock fees. Some lenders offer a rate lock fee to protect low-interest rates in exchange for a lump sum fee.
- Private mortgage insurance. If you’re putting less than 20% down, and you aren’t using qualifying first-time homebuyers, Veterans Administration or Credit Union offers, you may need to pay an additional amount for private mortgage insurance that protects a lender against losses if you can’t make payments.
- Prepaid interest charges. These are the interest fees associated with the amount of interest that accrues from the close of escrow to when you make the first payment.
These fees can account for between 0.5% to 1+% of the sales price.
If you’ve taken out a loan to purchase the home, you’ll also have to secure homeowner’s insurance. In many cases, your first year of insurance payments is made upfront via closing costs – although that varies. After that, buyers make homeowner’s insurance payments on their own and provide proof of current insurance as per the lender’s requirements.
Florida homeowners pay property taxes at an average of between 0.83% and 0.98% of a home’s value. When buying a home, closing costs cover six months of property tax payments to give the county assessor’s office time to catch up on the paperwork. After that, you receive bills directly from them.
Escrow companies are neutral, third-party agents that hold on to the funds and assets related to the transaction until the sales documents are officially signed and the escrow is closed. They take anywhere from 1% to 2% of the sales price in exchange for their work.
Depending on where you purchased your home and other transactions that occurred to facilitate your sale, the closing costs may also cover the costs for:
- Real estate attorneys
- Flood determination and monitoring fees
- HOA fees
- Lead-based paint inspection (for homes built prior to 1978)
- Building/pest inspections
Tips to Minimize Closing Costs
Your real estate agent should let you know a rough estimate so you have what you need when you sign the final documents. That said, there are things you can do to minimize those costs.
- Take advantage of a buyer’s market. Currently, we’re in the midst of a seller’s market but real estate markets perpetually fluctuate. In a buyer’s market, many buyers make offers that include the sellers paying the closing costs (or a portion of the costs). This lets buyers off the hook or can drastically reduce the final closing costs.
- Carefully review lender “Loan estimates.” Look carefully at prospective lenders’ “loan estimate” sheets to determine which lender offers the best deal. You may find the fine print around points, rate lock fees, and so on. If finances are confusing for you or you’re not used to “lender speak,” your real estate agent can help you decipher which one is the best deal overall.
- Shop for the right services. While certain services are required for lenders to fund a loan (appraisals, inspections, and title searches), you can select your own professional for the job. Shopping around may save you money.
- Consider a “no closing costs loan.” If you maxed out your savings to make the down payment, you might need to qualify for a loan that covers the closing costs, knowing you’ll pay a little more each month for the privilege. And, due to interest rates, that “little more now” adds up to more than you would have paid upfront over the 30-year loan term.
Minimize Costs with the Right Realtor
Finding a licensed and experienced realtor is the wisest move you can make when buying a home. It’s our job to make the process as smooth, stress-free, and cost-free as possible. The team at Southern Exclusive Realty excels at helping first-time buyers (and those who haven’t purchased a home in a while) keep closing costs as low as possible.
Give us a call at 386-279-7244 to schedule an appointment. You deserve to live the life you’ve always dreamed of, beginning with your home. So, start the journey, wherever it might be beginning, with Southern Exclusive Realty.