Closing costs are the fees associated with buying a property and are required to close the transaction. Closing costs can include appraisal fees, title insurance, legal fees, taxes, commissions, pre-paid property tax, mortgage insurance, and can even extend to moving expenses and certain upgrades or repairs to the new property.
Buyers need to prepare for these one-time expenses and make sure their budgets reflect more than just the upfront costs.
Let’s take a closer look at the closing costs to help you estimate what you should put aside so that you can mitigate any surprises.
Planning for Closing Costs
You’re always better overestimating what you will need to pay in closing costs. The best advice is to budget around 4% of the purchase price of the property to pay for all the associated closing costs. This number could increase or decrease depending on the size of the home, location, level of legal requirements, among other variables.
Closing Cost Breakdown
Appraisal fee: This fee covers the services provided by the appraiser to assess the market value of the proposed property.
Title Insurance: This type of insurance is mandatory and protects against any fraud or issues with the title of the property.
Lawyer Fees: You will need to contact a lawyer. The fees charged will consist of a title search, prepare the mortgage, drafting the deed. There could be other fees that are specific to your purchase. Typically, lawyer fees for the average home is a minimum of $500 plus taxes.
Utility Adjustments: Prior to closing, the buyer is responsible to reimburse the seller for any prepaid utility charges, or to cover any adjustments. Your lawyer will advise you of these costs.
Mortgage Insurance: This is sometimes not associated with closing costs but it is too often left off budgets. Based on the amount you’re borrowing and your down payment, you might have to insure your mortgage. This can cover the lender in the event of job loss, disability or death.
When calculating your budget for purchasing your next home, make sure to include all closing fees. Even overestimate certain expense like lawyer fees just in case costs come in higher due to unforeseen circumstances.