You might be an old pro, having brought and sold a number of homes in the St. Louis Metropolitan Area, or you might be a first-time homebuyer. No matter which category you fall in, closing costs can muddle your house purchase because you need to budget for those costs, as well as put down the largest possible deposit you can.
“Closing costs” refer to the expenses that are charged that are above the purchase price of your residential property. There are a variety of closing costs, such as fees for a property title search, title insurance coverage, taxes, lender costs and some upfront fees such as homeowner’s insurance. A few of those costs are nonnegotiable, such as recording or transfer taxes charged by Missouri or your local St. Louis municipality. Others, such as your lender’s fee, can be negotiated.
A buyer’s closing cost amount will vary based on the size of the loan, taxes and fees, but a basic rule is that they will average between 2% to 5% of the purchase price of the home. For instance, if you’re purchasing a $250,000 house, the total closing costs might range from $5,000 to $12,500. The national average for closing costs on a single-family home in 2018 was almost $5,800 including taxes.
What do Closing Costs include?
If you are a homebuyer, by law it is required that you receive a loan estimate within three days of your lender getting your loan application. That document gives you a quote of your closing costs. Three days prior to your scheduled closing, you must get your closing disclosure, a document that provides the final information about your loan and your closing costs. There are three types of closing costs a buyer will pay:
Lender fees. This can be all the fees bundled into one charge called an “origination fee.” Or it can be broken down into a list of things such as delivery fees, appraisal costs, administrative charges, processing costs, a credit check, transfer taxes, a flood certification, and underwriting fees.
An optional closing cost is a discount point, equivalent to 1% of the loan amount. You should ask your lender about whether it would benefit you to pay discount points.
Title fees. About 70% of closing costs are title-related which is why buyers should shop around for title services if they can. Those costs consist of a title search, title insurance and settlement services.
Lenders require buyers to purchase title insurance that covers the lender up to the loan amount. Most real estate experts recommend that buyers also purchase optional owner’s title insurance to protect their own investment in the home. Both types of title insurance coverage provide protection if someone claims he or she has an ownership right to the property or has not been paid for work done to the property and has placed a lien against it. Title insurance can protect you if the previous owners stopped paying taxes on the home.
Prepaid costs. The majority of lenders need borrowers to set up an escrow account to collect home owner’s insurance premiums and property taxes. That will include one year of your homeowners insurance plus two months additional premiums to be kept in escrow and two to six months of property taxes depending on when the tax bill is due. If you make a down payment of 20% or more, you can sometimes be exempt in paying these.
Who Pays Closing Costs?
Both buyers and sellers have costs to pay at the settlement table, however what they pay depends upon negotiations between buyers and sellers. Sellers typically pay the real estate agent’s commissions at the closing, but in some areas, they pay other fees, too.
Buyers typically pay for most of closing costs, but there can be exceptions. Buyers can negotiate with the sellers to finance the cost.
How Can I Avoid Paying Closing Costs?
You’re probably not able to avoid paying closing costs entirely. While some costs such as transfer taxes and property taxes can’t be adjusted, there are numerous ways to decrease your out-of-pocket costs at the closing. The two most typical ways are lender-paid or seller-paid closing costs.
Basically, buyers can ask sellers to allow them to raise the purchase price in exchange for a credit at closing to cover closing costs. That’s a seller-paid closing cost, or one that can also be called a “buyer-financed closing cost.”
A potential issue for buyer-financed closing costs is that the house must appraise at the full purchase price, as well as including the extra for a closing cost credit. Your St. Louis real estate professional knows the local market and can assist you in evaluating whether there will be appraisal problems with this strategy.
Buyers can also ask for lender-paid closing costs, which means the lender will pay the closing costs and charge a higher rate of interest to recover the cost. No matter whether it is seller-paid or lender-paid closing costs, those costs are financed by the buyer with either a higher loan balance or higher mortgage interest rate.
The majority of closing costs are set charges that can’t be changed, but some can be negotiated. There are also costs that can be shopped for, such as: home and pest inspections, property surveys, and homeowners insurance.
How Can Cash Flow and Closing Costs Be Managed?
Individuals with low to moderate incomes might get homebuyer assistance in the form of a grant or loan. These types of programs might charge higher interest rates.
Programs are offered through nonprofits, state and local government agencies and possibly from the employees company.
Another strategy to help with cash flow is to negotiate the settlement date, which can impact the amount you pay in closing costs, like prepaid interest. If you close at the end of the month, a lender will only charge one or two days of prepaid interest, where as if you close at the beginning of the month, you will be charged the full 30 days of interest.