Buying a house for the first time can be a process full of unknowns, and one of the biggest mysteries is: What are closing costs?
Most potential buyers understand that a down payment will be needed to acquire their new dream property, but many are unaware that an additional large cash outlay will be required to complete the transaction. Closing costs and the parties that are required to pay them (buyer, seller, lender) vary by region, but a good rule of thumb is to expect an additional payment of 2-5% of the total purchase price in order to complete the sale.
Below are six of the most typical line items associated with house closing costs.
Some lenders charge potential buyers an application fee simply to qualify for a loan. Other charges, like a credit check or an appraisal fee, may be lumped into this application charge. An appraisal fee, in particular, is something buyers can't avoid. Any mortgage lender will require both an appraisal and an inspection in order to ensure that their investment in your family's investment is on solid footing. The lender's "origination fee" may be rolled into this as well.
Title insurance may comprise up to 70% of your closing costs. It is likely that this expense will be required for both you and your lender. This insurance protects an owner (and in a sense, your mortgage lender is also the homeowner) in case any liens against the property are revealed. A lien can be issued for any unpaid work that was completed on the home. Title insurance also covers the unlikely scenario of discovering that the title of the home was not transferred properly in the past and ownership is disputed.
One year of homeowner's insurance fees may need to be paid upfront, plus an additional two months' may be kept in reserve. Depending on your municipality's billing cycle, six months or more of property taxes could be required as well. If your home has a large price tag, this could mean thousands of dollars added to your closing costs.
Loan Discount Points
If buyers have additional cash on hand, they can lower the total lifetime cost of the loan by paying upfront "points." One point is equal to one-percent of the loan amount, and lowers the interest rate by a percentage point.
Private Mortgage Insurance
If you have secured a loan with a down payment of less than 20% of the total purchase price, then you will likely need to pay Private Mortgage Insurance (PMI). This insurance protects the lending institution in case you default on the loan. If PMI is required, the first month's payment will be deposited on or before closing.
A home has a buyer and a seller, so it makes sense that sales tax may be required when a title is transferred. Since they are the financial beneficiary, this cost is most often covered by the seller.
These costs and more may be the responsibility of a lender, buyer, or seller. No two real estate transactions are exactly alike, and almost all terms are almost always negotiable.
The negotiation process is where an experienced realtor can be incredibly helpful. They understand the local market, the behaviors of sellers, regulations and more. If you're ready to buy a home, Jessica & Sarah are the Iowa realtors ready to fight for your needs. Contact us today and move one step closer to closing on the house of your dreams.