What Are Closing Costs?
There’s a lot to think about when buying a new home or researching home buying options. In the planning stages, many new homebuyers know to research mortgage rates, but there’s one aspect of the process they sometimes overlook — closing costs. “Closing” is the point where the title of a property is transferred from the seller to the buyer, and “closing costs” are fees associated with a new home purchase that are paid at the closing of the real estate transaction.
Closing costs aren’t always top of mind when budgeting for a new home, but they’re an inevitable part of the home buying process. For that reason, we recommend incorporating closing costs into your budget as soon as you begin saving for a new home.
To help you better understand closing costs and how to plan for them, we reached out to Jeff Divack at Intercoastal Mortgage Company, a lending affiliate of Van Metre Homes (you can check out their mortgage calculator tool on our site). Here Jeff breaks down the types of expenses you can expect to cover after closing on a new home and offers some advice for new homebuyers.
How much should I expect to spend on closing costs?
Overall, a homebuyer should estimate their closing costs to be 3% of the purchase price of their new home. The actual amount could be more or less than that, depending on the price and location of the home, but 3% is a good rule of thumb.
What fees can I expect at closing?
Jeff breaks closing costs into five categories:
Lender fees are charged by banks or other financial institutions to process and fund your loan. They can include anything from application fees, credit checks, appraisal fees, underwriting fees, inspection costs and more.
Title Company Fees
The title company (or settlement company or settlement attorney) will handle the legal documents related to the transfer of ownership from the seller to the buyer, along with all of the funds and accounting associated with the purchase. In addition to their fee for this work, the title company will provide Title Insurance, a form of insurance that protects the buyer and the lender if there is a problem with the title. Jeff gets a lot of questions about Title Insurance so we’ll do a follow-up blog post soon on the topic!
State and County Transfer and Recording Taxes
These taxes are collected in some localities when a mortgage loan is made or when a property changes hands. The fees are set by state and/or local county governments. In Virginia, the stamp tax is $3.33 per thousand of the purchase price plus $3.33 per thousand of the loan amount. For new home purchases, some contracts (including those for Van Metre Homes) call for the buyer to pay the Grantor’s tax and, in Northern Virginia, the congestion relief tax (these taxes are usually paid by the seller).
If you plan to purchase a townhome, condominium or another type of property in a planned development, you will need to keep community-related costs like condo fees or Homeowners Association (HOA) fees in mind. There may also be a capital contribution – a charge to “buy in” to the community.
Prepaid and Reserves
Prepaids are costs associated with your home that need to be paid in advance when getting a loan. These include the first year of Homeowner’s Insurance and Mortgage Interest that will accrue between the closing date and month-end. Property Taxes and Homeowner’s Insurance are collected to put into your Escrow (reserve) Account so that you have enough reserves to pay these bills when they are due. Keep in mind: unlike rent, which is paid in advance of each month, your mortgage payment will be paid in arrears. The mortgage payment you pay in June, for example, pays for the month of May.
How can I best prepare for home buying expenses, closing costs included?
When taking the first steps to buying a new home, Jeff recommends talking to a lender early. Your lender will help you identify any potential weaknesses so you can address them before entering the housing market. Additionally, you may think you have a weakness that isn’t as big of an obstacle as you think it is. If that’s the case, your lender can help you start researching which options are right for you. Finally, it is quite common for Van Metre Homes and other sellers to offer some allowance toward closing costs, so make sure to ask your seller what’s possible.
Have questions about closing costs that we didn’t cover here? Get in touch and we’ll talk you through them.