If you’re planning to buy a home, it’s well worth thinking long and hard about your budget. But, while it’s easy to concentrate on your mortgage and down payment, an accurate budget has to take closing costs into account as well.
Overlooking these additional costs can be a big mistake which could lead to having your offer rejected on your dream home. In this guide, we’ll look at how to calculate closing costs and what you can typically expect to pay. We’ll also review some top tips for reducing closing costs altogether.
What Are the Typical Closing Costs for Buyers?
Every real estate transaction is different, so the exact closing costs you can expect to pay will depend on many variables. However, for anyone wondering, “How much are buyer’s closing costs?” it is possible to get a rough idea.
In the U.S., the estimated closing costs on a typical home are generally between 2 and 6% of the home’s overall value. And how much are closing costs for Canadian buyers? The good news is that the figure is generally slightly lower, averaging between 1.5 and 4% for a typical purchase. However, in both cases, this figure can soon shoot into the tens of thousands of dollars, so you mustn’t neglect to budget for closing costs.
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What Are Closing Costs on a House? A Breakdown
Knowing your average closing costs is great, but for a more accurate figure, it’s essential to understand what is included in closing costs. With that in mind, let’s look at the major components:
1. Legal Fees
In almost every home purchase, you’ll need to work with a closing attorney. They oversee the transaction as a neutral third party, representing neither the buyer nor the seller. As such, their fee tends to be split between both. Prices differ depending on location, but generally, you can expect to pay between $500 and $1,500.
2. Appraisal Fee
If you’re taking out a mortgage to buy your home, your lender will require the property to be valued. This is done by an appraiser, and on average, it’ll cost about $300, though larger homes can cost considerably more. On top of that, if the seller takes out extensive renovations or repairs after the first appraisal, the house will often need reappraising, which will again cost the same.
3. Home Inspection
Most lenders will require you to have the home inspected before they’ll agree to lend you money for it. Meanwhile, a home inspectionWhat is a home inspection? A home inspection evaluates and details a real estate property’s... More isn’t mandatory if you buy without a mortgage. However, it’s always worth doing it anyway since a home inspector can uncover potentially costly issues, such as structural problems.
Generally, you can expect to pay between $250 and $700 for a typical home inspection. However, for a more thorough assessment of specific issues such as lead paint, roofs or pests, be prepared to budget more.
4. Mortgage Fees
You’ll be subject to several fees when you take out a mortgage. These include:
- Credit reportWhat is a credit report? While a credit score is a three-digit number that lenders... More fee: About $30
- Application fee: Generally between $300 and $500
- Service and admin costs: Typically around 1% of the loan value.
5. Title Insurance
Most lenders will require you to take out a title insuranceWhat is title insurance? Title insurance is a policy that protects property owners and financial... More policy before they agree to provide you with a mortgage, as it protects both you and them from future title claims. Prices vary widely depending on location and the property size, with some policies as low as $500 and others up to $3,500.
6. Private Mortgage Insurance (PMI)/Mortgage Default Insurance
Most lenders will require you to take out PMI if your down payment is less than 20%. This typically costs between 0.5% and 2.5% of the loan value and is generally rolled into your monthly mortgage payments. However, it counts as a closing cost, as you’ll often need to pay the first month before closing the deal.
7. Home Insurance Policy
Your lender will often require you to take out a home insurance policy to protect their investment. This is usually paid annually or bi-annually, and the cost varies widely depending on location, property size and property type.
8. Escrow Fees
Almost every real estate transaction will require an escrow service, which is essentially a third-party holding account in which you and the seller will be required to deposit various fees — such as the down payment — and documentation before closing. Once both parties have fulfilled their obligations and deposited the necessary items into escrow, the account’s contents will be distributed to the relevant parties, i.e., money to the seller and deeds to the buyer.
Escrow services typically charge about 1% of the sale price, and the fee is usually split between the buyer and seller, though this is often up for negotiation.
9. Property Taxes and Utilities
If the seller has prepaid any taxes or utilities, the buyer typically must reimburse them. The cost is usually calculated by an attorney and is generally between $1,000 and $2,000.
10. Documentation and Recording Fees
Numerous professionals and companies will be involved in your real estate transaction, each with a fee to be paid. Typically, you can expect the following:
- Courier fees (for transporting physical documents): around $20
- Bank processing fees: between $25 and $100
- Notary fee: around $100
- Recording fee (charged by the lender who will pay the county to make a public record of the transaction): about $50.
How to Cut Your Closing Costs
So, now that you know what closing costs you can expect to face, it’s easier to reduce them. Here are our top tips:
1. Negotiate with the Seller
The easiest way to cut closing costs is to transfer them to the seller. This isn’t always easy, but in some cases — notably buyers’ markets, if the home has been on the market a long time, the seller wants a quick sale, or the property has some issues you can live with — it can be possible.
Speak with your real estate agentWhat is a real estate agent? A real estate agent is a professional who is... More for advice, and when you make your offer, you can ask the seller to cover some or even all of the closing costs outright. Often, they’ll come back with a counteroffer, typically asking for a higher purchase price, but all closing costs paid. This is an excellent solution if you’re struggling to find the cash for closing costs in the short term, but it will result in higher mortgage repayments.
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2. Choose Your Lender Carefully
It really is worth shopping around for your mortgage, so when you’re looking to get pre-approved, be sure to get offers from numerous lenders. Each should provide you with an itemized estimate of your loan, with information regarding the fees you can expect to pay. Then, when you have several offers, carry out side-by-side comparisons to see which can save you the most in closing costs.
3. Consider a No-Closing Cost Mortgage (U.S. Only)
Also known as a Zero-Closing Cost Mortgage, this is an option for U.S. borrowers wondering how to get closing costs waived altogether. These work by rolling your closing costs into the overall loan amount. So, while avoiding the considerable lump sum at closing, you’ll take out a larger loan, typically with a higher interest rate.
4. Choose Your Closing Date Wisely
Many taxes and costs, such as utility costs, are prorated, i.e., they adjust to how long you’ve been living in the home. So, if you choose a closing date towards the end of the month, you’ll benefit from lower fees and taxes than if you had closed the deal at the beginning of the month.
Are Closing Costs Tax Deductible?
One final way to reduce your closing costs is to see if they’re tax deductible. While not many closing costs are, some, such as property taxes that have been paid in advance, can be.
Mortgage points, purchased by borrowers looking to reduce their interest rate, are also tax-deductible. Each point generally costs 1% of the total loan amount and normally drops the interest rate by 0.25%. The total amount of any points can be deducted in the year they were purchased.
For an overview of the real estate market in popular cities across Canada and the U.S., visit the links below:
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