If you’re like most home buyers, you’ve got a budget. You also want to get the most house possible for your money. Before you start shopping for dream homes at the very top of your budget, however, you should factor in closing costs. Or you might find that you break the budget before you even call the moving company!
💲 What Are Closing Costs?
Closing costs is a blanket term that covers a range of administrative and legal fees that are paid at the end of a home sale transaction. They may be paid by either the buyer or the seller, depending on the terms of the sale.
These costs are not included in the sticker price for the home. They will be additional to the cost you see on the advertisement.
💵 What are closing costs based on?
Where you live, what type of property you buy, the local tax laws and a variety of other factors can all affect the closing costs you need to pay when you purchase a home. If you’re buying in a different state, it’s always worth investigating what these costs are based on before you make an offer, to avoid unpleasant surprises!
In most cases, closing fees will fall somewhere between 2 and 5 percent of the purchase price of the home, so buyers are well advised to factor that into their budget when shopping for homes. In fact, we’d recommend that home buyers always build a small cushion into their budget, for minor repairs and changes they’d like to make when they move in.
💰 What Are Typical Closing Costs for Buyers?
There’s no hard and fast rule that governs what you will pay when you close on a home in every transaction, but there are some standard fees ad levies that you may be required to pay. These include:
- An application fee to the lender you are financing your home through.
- The cost of an attorney to review your contract before you finalize it.
- An appraisal of the home. In some cases, your financial institution may insist on this.
- Escrow fees, if your home purchase will be subject to an escrow agreement.
- The cost of a credit report. Again, most financial institutions will insist on this.
- Various insurance policies. Some may be voluntary, but there are several that are mandatory, depending on where you are purchasing.
- Inspections, including a general home inspection, lead paint inspection, asbestos inspection and others.
- Property and other taxes.
It’s worth noting that if you are buying a new home from a builder or property developer, it may be easier to negotiate that they pay some of these costs, which will reduce the overall price for you. This is particularly true if a development has had sluggish sales, or the property market has turned during the building process.
There are also some options to choose a “no closing” mortgage, where the lump sum costs associated with closing are factored into your repayments. But remember, if you choose this route, you will be paying interest on those costs.
Finally, remember that it may be possible to negotiate with the seller to pay some or all the costs associated with the deal. The more motivated the seller, and the better your realtor is at negotiating, the more likely this is.
📝 Which Closing Costs Are Tax Deductible?
If you were hoping to deduct a big chunk of your closing costs from your next tax bill, you’re going to be disappointed.
Although there are a laundry list of fees and costs associated with taking ownership of a new home, the only ones you can deduct are mortgage interest, and certain property taxes – and then only in the year you purchase the home! Be sure to keep all the relevant paperwork handy and make it available to the person who does your taxes.
If you are looking to save on closing costs, maximize your budget and get more bang for your homebuying buck, the best way to do that is to hire a realtor who knows the area, has a firm grip on the local market, and can help you spot great deals. With a little negotiation and finesse, even with closing costs, you can get the home of your dreams at a price you won’t lose sleep over!