What to Know About Closing On Your First Home

Buying a home for the first time can be exciting, but also nerve-wracking. You need to budget for the house purchase price, your down payment, and the mortgage interest rate, not to mention actually filling the forms for the mortgage application and ensuring that everything is in place to finally close the deal on your dream home.

With everything that's on your plate, closing costs are easy to overlook. But forgetting about closing costs is a mistake. The mix of fees that you need to pay before the house is finally yours is confusing and might take you by surprise if you're not prepared.

Here's what you need to know about closing costs so that you're not caught off-guard on closing day.

What Are Closing Costs?

Closing costs are all the fees and expenses that need to be paid in order to close the loan on your new home apart from the mortgage itself. The various fees you need to pay can vary depending on the type of home you buy and where you live, but the fees typically include miscellaneous administrative and processing fees, mortgage-related fees, taxes, inspections, and more.

How Much Are Closing Costs for a First-Time Homebuyer?

There is no definitive list of the types of closing costs or their amounts. They depend on several factors including the:

• Size of your home
• Down payment amount
• Type of loan you choose
• Any deal you negotiate with the seller or the bank
• State where you're buying the house

However, on average, closing costs run between 2% and 5% of the purchase price of the house, which means that you would pay anything between $4,000 and $10,000 for a $200,000 home.

What's Included in Closing Costs?

There are quite a few fees included as part of closing costs—they fall into three categories:

Lender Charges

Loan Origination Fee

Your lender or broker typically charges this fee, which includes all the small charges required to set up the loan. It is usually charged as a percentage of the loan (0.5-1%)

Application Fee

This fee covers all the administrative costs incurred while applying for the loan. It varies depending on the amount of work it takes to process your application.

Attorney's Fees

Depending on the state you're in, you might need an attorney present to handle the transactions. The fee depends on the number of hours the attorney works for you.

Discount Points

These are optional fees you can pay upfront if you wish to lower your mortgage rate. The fee is usually 0-1% of the loan amount.

Title Insurance

Lenders require you to purchase title insurance, which protects them in case there's any dispute over the property. It also covers the cost of checking historical records to ensure the property can be legally transferred to you. You can also protect yourself against these issues by purchasing a buyer's title insurance.

Mortgage Broker Fee

This is applicable only if you work with a mortgage broker. Their commission varies between 1-2% of the purchase price.

Property-Related Fees

Appraisal Fee

This is the fee required to verify the value of the house. It protects the lender by making sure the property is worth the loan.

Home Inspection Charges

Most lenders require a home inspection, and even if they don't, you're better off getting one done. These charges are paid to a home inspector to check if your home is structurally sound and livable. If the inspection turns up problems, you can negotiate the sale price or even walk away from the deal, depending on the severity of the issue.

Other Inspections

Depending on your lender and the property itself, you may need to pay for other types of inspections as well, such as pest inspections, flood certification (to find out if the property is in a flood zone), or even a verification of land boundaries.

Prepaid Costs

Property Taxes

You're typically responsible for paying property taxes for the remaining tax year at closing. If the seller has already paid the taxes, you need to reimburse them for that amount.

Prepaid Interest

Most lenders need you to prepay the interest that accrues on your mortgage between the date of closing and your first payment.

HOA Fees

If the property you're buying is part of a homeowners' association (HOA), you may need to pay the HOA fees upfront.

Homeowners Insurance

Lenders usually require you to purchase homeowner's insurance before closing, to protect their investment. You typically need to pay the insurance premium for the first year at closing.

Who Pays Closing Costs?

Most closing costs are paid by the buyer, but the seller pays a few fees as well, such as the real estate agent's commission, which is a big cost—usually 5-6% of the sale price. The buying and selling agent usually split the commission.

Also, the fees for the buyer's title insurance and the transfer taxes can fall on either the buyer or the seller, or it can be split between both. The rest of the closing costs mostly fall upon the buyer.

When Are Closing Costs Due?

Most closing costs are due at closing, i.e., when you sign your final loan papers. But there are a few costs that need to be paid in advance, such as the appraisal fee and the home inspection fee. Also, sellers often ask for an "earnest" fee, equal to 1-5% of the total purchase price, as a show of good faith. This is to be paid when you make the offer on the house and it can be used toward your final closing costs or your down payment.

How to Reduce Closing Costs

The closing costs are a small percentage of the total purchase price of your new home, but they can be a challenge to pay. You can try to negotiate or even eliminate certain closing costs, though. Here are a few strategies you can use to reduce your closing costs:

Negotiate with the Seller

You can try to negotiate a deal with the seller to reduce the amount that you pay upfront. In such a deal, the seller would agree to pay part of the closing costs for the buyer. However, this amount would be added to the sale price, so you need to be careful while making such a deal.

Shop Around

You can try to shop around to ensure that you're getting the best possible deals on your closing costs. While some closing costs like property tax are fixed, you can get lower prices on others like appraisal fees or attorney fees. You can also look for deals and offers from lenders. They might have specific programs to ease your burden.

The Bottom Line

Closing costs can be confusing and they're often misunderstood, especially since they include so many small fees. But if you budget for the average total closing costs in your state and find ways to negotiate lower costs, they won't take you by surprise when you close the deal on your very own first home.