Regarding financial matters, everyone hates to be hit unexpectedly by large utility bills or delayed payment. To avoid such, you need to plan and prepare yourself for those significant changes in your bank account. The same applies when purchasing a house. Before finalizing the house payments and everything, most buyers want to have an estimated figure of the amount they expect to spend. However, there is undoubtedly one thing that is quite a hassle to estimate when buying or selling a home; the closing costs.
The closing costs are those extra expenses, one incurs when finalizing a real estate transaction. Such fees include appraisal fees, taxes, title insurances, report charges, surveys, and more. These fees vary significantly according to a wide range of factors and can escalate considerably and affect you, regardless of whether you are the buyer or seller.
The rough estimate that most websites and financial advisors will put across is that closing costs will add up to 2-5% of your home’s value. True, but let’s factor that a $200,000 home will cost anything between $4,000-10,000- quite a wide range! Let us narrow it down for you in this article by showing you how to calculate closing costs for real estate.
Method 1: Calculating the Buyer Closing Costs
i). Down Payment
Various types of mortgage loans have varying down payment requirements. Most mortgage plans will request a down payment of 20%, but some request much lower. For such mortgage plans, you have to pay a mortgage insurance per month, which will be inclusive of the closing costs. It would be best if you secured a mortgage plan that favors your account balance.
ii). Lender’s Origination Fee
The origination fee caters for all costs of compiling the paperwork, supporting documents, and developing the client file. Some mortgage lenders will charge a specific loan interest rate, often referred to as ‘points.’ Typically, a single point equals 1% of the total loan.
iii). Title Services & Lender’s Insurance Costs
The Title document is very significant in the process of purchasing a home. This document highlights the house owner to protect the buyer against fraud. Title Services Company offers this service. Mortgagers request borrowers to take up an insurance policy to protect them against such frauds. The lender insurance and title services costs vary across different companies and states.
iv). The Appraisal Charges
The lenders request a property appraisal to determine if the secured borrowers’ loan matches the home’s value. The lender hires the appraisal and will inform you of the results. These services go for $300 -500.
v). Credit Report Charges
You need to find out if your mortgage lender is charging you for your credit report. Some lenders might charge a $15 retrieval fee per Bureau. Since there a three major Bureaus, this fee will accrue to around $45. In case it exceeds, question.
vi). Annual Property Taxes
The local property taxes might vary considerably depending on the state or country your house is located. Get the property tax history of your home from the county or city tax office, or the real estate agent.
vii). Escrow Property Taxes
An escrow account for homeowner’s insurance and property taxes is inclusive in the mortgage payment. The lender sets the charges but, in turn, hires the tax professional.
viii). Escrow Homeowner’s Insurance
The insurance agent offers you a package discount if you include your homeowner’s insurance. However, it would be best if you looked for other suitable options. When selecting the best insurance policy, take into account all terms, not only annual costs. The insurance policy should cover liability, loss of personal belongings, building, and contents. Just make sure you secure the best deal.
ix). Determine Responsibility for any Additional Optional Fees
Each home-buying process is unique; hence there are lots of variables to take into account. If you are uncertain about something, request for more information from the real estate agent; they are at your service.
- Government recording fees, usually charged by local government, cater for recording new house ownership, and varies across different locations.
- If your house is located in a flood-prone area, your lender may require a flood certification, which will be inclusive of the closing costs.
- A house survey is sometimes necessary to draw your property’s borderlines. Most brokers and lenders will recommend renowned professionals and firms.
- House inspection costs arise once your mortgage is granted. In most cases, the buyer caters for these expenses, but others might negotiate them into the closing costs.
x). Add Up The Costs
If you add these charges, it adds up for the buyer closing costs for the first escrow deposit. Some of these costs are paid only once while others are paid in installments. Compare your calculations with those of the lender. The lender’s estimate of these costs is known as a ‘Good Faith Estimate.’ If you are uncertain by some outline charges, request for additional information from your lender. You can try your luck by negotiating for a lower charge.
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Method 2: Calculating the Seller Closing Costs
Real Estate Agent’s Fee
The fee is something between 6-7%. The charge can be pre-determined but is settled after the final home sale. If both parties (sellers and buyers) have an agent, they join hands to pay the agent. However, the buyer won’t pay the agent directly; it is the seller.
Home Warranty
The home warranty is optional. It protects the buyer for any structural or appliance problems that might occur within the first year. These warranties are a way to attract prospective buyers and have the advantage of being relatively cost-efficient.
Unpaid Taxes
The seller needs to access the sum of unpaid taxes for the property since the last payment to the closing date. The buyer won’t get money off his/her pocket to cater to this- so, the seller should pay him/her.
Negotiate Additional Costs
In some situations, the seller will agree to cater to some of the closing costs, thus easing the buyer’s financial constraint. This negotiation is done once the buyer agrees to buy the home, usually after the home inspection.
Add Up The Costs
The total of these costs will give the seller an idea of the charges incurred in the property sale. In comparison to the buyer, the seller requires very little up-front cash. A considerable percentage the seller uses to cater for these closing costs comes from the house sale.
Summing up, the closing costs, for either the buyer or seller, are variable on multiple factors such as state and country requirements. We hope this article helps you calculate the closing costs the next time you are up for a property sale or buy.