Buying a home is an exhilarating journey that will take both the seller and the buyer through many twists and turns. The culmination of all the wheeling, dealing, and signing is the closing date. This is the pinnacle of the process, but it is not the time to rest on your laurels, or you will be caught unaware. And if you are wondering, ‘who pays closing costs?’, the answer may surprise you. That is because both the buyer and the seller will be responsible for closing costs, though the buyer pays the lion’s share of the fees.

When you are buying a new home, a lot of the focus is on the down payment. The down payment is the percentage of the home price that the buyer must dole out for the property. While the down payment is a critical part of the process, it is not the only expense involved with the mortgage process. You’ve also got to be prepared for the closing costs, which are a cumulation of all the fees and expenses that have accumulated from the various services provided to make the home buying process go smoothly. As the name suggests, closing costs are paid on the closing date for the real estate deal. 

A common question that homebuyers and sellers alike would like to know is, “are closing costs tax-deductible?” And while owning a home does come with its share of tax-related benefits, the closing costs are not typically included here. But, of course, there are exceptions, and a general rule of thumb is that if the closing costs are deemed tax or interest-related, then they may be tax-deductible. 

Of course, the next obvious question that homebuyers would like to know is, “How much are closing costs?” The answer is that it varies. But you can generally expect that closing costs will run you 2-6% of the mortgage balance. 

What Goes Into Closing Costs? 

You may want to drill down a bit deeper into what comprises closing costs. With the rise of digital mortgages, transparency has become the name of the game. And when it comes to what goes into closing costs, you should expect nothing less. 

Closing costs do not follow a cookie-cutter model and will vary based on several factors, such as the mortgage type, location, and lender. Both the buyer and seller can expect to be provided with an itemized list explaining what makes up closing costs, which could resemble something like this: 

  • Appraisal Fees: This is one of those third-party fees that go to the appraisal company that the lender uses to assess the value of the home. The appraisal is the gauge by which the lender will decide the size of the mortgage. This fee could fall in the range of $300-500. 
  • Attorney Fees: In some states, you’re required to have an attorney, the fees for which could be wrapped into the closing costs. 
  • Escrow Fees:  The escrow company and/or attorney overseeing the closing will also tack on fees. 
  • Insurance: This includes title, homeowners, and private mortgage insurance. Title insurance is for both the buyer and the seller, and the fee will be tied to the price of the home. The buyer can expect to pay for the first year of homeowner’s insurance at the closing, but whether the buyer will have to pay private mortgage insurance depends on the size of the mortgage. The more you can put toward your down payment, the less like you’ll need mortgage insurance, which is designed to ease the risk for the lender in the event of a default. If you put down less than 20%, chances are you’ll need mortgage insurance, a premium for which could be due at the closing. 
  • Loan Origination Fees: The lender will collect loan origination fees at the closing. These fees will cover the processing and underwriting of the mortgage, either listed separately or bundled together. The borrow can expect this item to cost them approximately 1% of the mortgage amount. 
  • Mortgage Points: If the borrower can negotiate mortgage points or discount points as they’re also known, this fee will be doled out to the lender as part of what makes up closing costs. In exchange, the borrower gains access to a more attractive interest rate. 
  • Property Tax: These fees are regional-focused, but in general, homeowners should be prepared to pay the first six months of property taxes as part of what goes into closing costs. Property and real estate taxes are subject to change. If the property is reassessed and the home value rises, so could the taxes.  In this case, the amount earmarked for taxes in escrow might fall short and more funds will need to be added. 

Is There a Way to Avoid Closing Costs? 

If you’ve saved every dollar just for the down payment of your new home and you can’t afford the closing costs, you might be able to find a workaround. One way is to agree to seller concessions with the other party. While there is a cap on the amount of the seller-paid closing costs, it can’t hurt to negotiate what you can. The percentage that the seller can direct toward the closing costs will depend on the type of mortgage that the buyer is getting. 

While it might sound too good to be true, another option is a no-closing-cost mortgage. This translates to your closing costs being lumped into the size of the mortgage. So while you won’t have to worry about coming up with the cash at the closing, those costs will be spread over the term of the mortgage, and you’ll end up paying more for it in the end. 

Explore Ratecloud’s Mortgage Options

Now that you know the ins and outs of closing costs, you are one step closer to buying the home of your dreams. Ratecloud can help get you there in an automated way that you have grown accustomed to with your mobile device. Learn how Ratecloud can help you save money with low interest rates on your mortgage. Get started on your digital mortgage application today.