You've found the home of your dreams, been pre-approved for a mortgage, made an offer to the seller, and soon you'll accept the keys. Congratulations! You may begin to feel some anxiety if you’re unsure about closing day and the costs involved. The best way to conquer that anxiety is to gain some knowledge about closing costs.
What are closing costs?
Closing costs are additional to the down payment, legal fees, and monthly mortgage payments. They typically add up to 5% of the purchase price of a home. Payment of these costs by the buyer closes the deal so that ownership of the residence may be legally transferred.
Your real estate agent and lawyer will go through likely scenarios with you to give a sense of how much money to set aside for closing. But these costs won't be finalized until just prior to the final transfer of ownership.
It's sometimes possible to roll closing costs into the cost of your mortgage, though this may affect the terms and schedule for monthly mortgage payments. In some instances, it may be possible to negotiate for the seller to pay some or all of the closing costs, though this too may result in a slightly higher purchase price.
Different rules apply if you are buying your home with the assistance of the FHA or USDA, so be sure to ask if there is relief offered for closing costs.
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What are closing costs based on?
Closing costs can vary depending on the purchase price of the home, its location, and local regulations and bylaws. Land transfer taxes are calculated using the final home purchase price, for example. In some areas, costly home inspections may be required; in other jurisdictions not necessarily. A knowledgeable local real estate agent should have a good idea of what will be involved. Even so, prepare for surprises.
An itemized list of closing costs is typically offered to the prospective buyer twice. The first is an estimate of anticipated costs and it's triggered when you make an offer. A second, often substantially different, list will arrive closer to the closing date. It can be different because the circumstances of each sale are unique. For example, certain legal and administrative costs and disbursements will increase if a purchase or property title transfer is not straightforward for some reason. Even if things remain simple, additional costs can add up. Don't be afraid to challenge each item or ask for an explanation if the initial estimate and the final closing cost list total are far apart. Some legal and financial professionals expect the buyer to assume the cost of every courier delivery or postal charge. They may be persuaded to remove some of these costs with push back.
It's wise to estimate generously and free up some dedicated cash ahead of time to avoid last minute financial scrambling.
What are typical closing costs for buyers?
There is a large array of costs that may be presented at closing. Some constitute a few hundred dollars, but others can add thousands to the final tally. Common closing costs can include, but may not be limited to, the following:
- bank fees associated with your loan
- home appraisal fees (often assumed by lender)
- the cash deposit due when you make an offer to purchase
- land transfer taxes – these can vary depending on where you live and on the purchase price of the home
- HOA (Home Owners Association) fees – if these apply they are not optional and are due at closing
- title insurance: you may have to pay this to protect your lender from errors on the title to your home. Owner's policies that cover you in case there's an inaccuracy on the title might be optional.
- homeowner’s insurance may be required by your lender with initial payments part of the closing package
- septic and well inspections may be mandatory for some rural properties
- property taxes – some may be due upon closing, especially if you are assuming any arrears from the previous owner
Which closing costs are tax deductible?
Most closing costs are not tax deductible when you purchase a home. But be sure to keep records of each item to be paid – because a few can be claimed. In the year of purchase, for example, mortgage interest and some property taxes may be tax deductible. In some cases, mortgage insurance premiums may also be deductible (both for the year in which you purchased your home AND going forward) – check with an accountant or real estate lawyer to find out if this could apply to you.