Buyer's Guide:
Understanding Closing Costs
Closing is the final step in the purchase of your home! The closing costs, often unexpected by first-time buyers, average 3% to 5% of the sale price and comprise a variety of fees. If a home costs $300,000, closing costs will be between $9,000 and $15,000 with the full amount due at final meeting. Use our closing checklist as a guide.
The Process of Closing
Closing is the meeting at which the two parties and their representatives sign documents, present disclosures and exchange funds, often called closing costs. It’s usually attended by the buyers, the sellers, the closing agent, attorneys (where applicable), a representative from the title company and the real estate agents. Sometimes the mortgage company attends, other times they simply send the required paperwork. The exact process and requirements will vary from state to state. Ask your Weichert Sales Associate for a list of documents that are required by your local laws.
Four business days before you close on the loan, you must receive a Closing Disclosure (CD) which reiterates the loan terms you will have received in your Loan Estimate and summarizes the transaction, as well as indicating which, if any, costs differ from estimates previously provided. Compare this to your Loan Estimate and ask any questions about differences. If everything follows the original agreement, closing should take about an hour. At the end of closing, you (and the bank, if you have a mortgage) will be the legal owner of your new home.
Do I Need a Lawyer at Closing and if so, How Should I Select One?
The rules about attorney presence at closing vary from state to state. It is mandatory in some states, while others allow real estate agents to guide the buyers through closing. In that case, it’s up to you to choose what will make you the most comfortable. Regardless of which option you choose, it’s always in your best interest to read every document that you sign.
Since closing documents and closing costs can be confusing, it can be very helpful to employ a lawyer whose job it is to find any issues and suggest ways to resolve them. Depending on the complexity of the transaction, finding mistakes before they become costly problems can save you money in the long run. If you need a referral, your Weichert Sales Associate will be glad to suggest attorneys with the appropriate experience.
Closing Costs
You will receive a copy of your closing costs 4 days prior to closing in your Closing Disclosure statement. Pay close attention to the amounts. Some closing costs are negotiable and others may have erroneous or inflated fees, called junk fees or garbage fees. Some junk fee examples are courier fees, email fees, miscellaneous fees and commitment fees. If you are unsure, it’s better to ask. There is no way to eliminate these added costs, but it may be possible to reduce them.
Fees generally include:
- fee for requesting your credit report
- a charge by the bank for administering the loan
- if you are required or choose to hire one
- the cost of having a licensed inspector examine your home
- the fee for a licensed appraiser to evaluate your home
- if applicable, the amount paid to the bank for a lower interest rate
- the charge for the surveyor to determine the boundaries of the property
- the premium for insurance in case there was a mistake in the title search
- the fee for the firm that performs the title search
- the fee paid to the local government for recording the sale of the house in their records
- the charge for processing a loan application
- The insurance required by the lender if your downpayment is less than 20%. A PMI payment will be due at closing.
What Type of Homeowners Insurance Do I Need and How Should I Find It?
Your lender will require you to have insurance to cover the full value of the property to protect their investment. The type of insurance will depend on the geographical location of the home. Almost all lenders require protection from fires or storms, but you may also be required to purchase protection from floods, earthquakes, hurricanes or tornados. Proof of insurance from an approved insurance company like the Weichert Insurance Agency is required prior to closing.
What Is a Title Search?
What Is Title Insurance?
A title search is exactly as it sounds – a search to make sure that no one else holds a title to your property and can make a claim to it. Title Insurance, which can be provided by an affiliated Weichert Title Company, covers the property in case there was a mistake in the title search. It is a requirement of most lenders and gives both the buyer and the lender peace of mind that their investment is protected in case a third party alleges ownership of the property.
Learn more about Title Insurance at our Resource Center.
Escrow
Simplified, escrow is the use of an impartial third party to hold funds, a deed or other item until a condition is met or until the completion of an event. Escrow agents will hold the buyer’s downpayment until closing and then transfer it to the seller. They may also hold the deed to the home until the financing details are complete and the title search is clear. The deed will then be transferred to the buyer. Once the service of the escrow agent is complete, escrow is considered closed.
Our Resource Center has more information about the process of escrow.
What Happens During Walkthroughs?
The best way to avoid any delays in your closing is by conducting two walk-throughs. The first is to identify any major issues with the appliances or the structure. Most often, you’ll inspect your new home 5 to 7 days before closing. It’s your chance to double check the plumbing, electrical and climate control, especially if the home has been vacant for a long period of time. Then, a second walk-through within 24 hours of the closing will allow you to validate that the owner has left the property in the condition stated in the sales contract and confirm that any agreed-upon repairs have been made. If not, you may need to renegotiate or delay the closing.
What Should I Do Now that the Home is Mine?
- Put your paperwork in a safe place; you will need it for taxes and for when you sell the house.
- Make sure the utilities are paid in full by the previous owners and then transfer them to your name.
- Change the locks, reset the garage door opener codes, change any alarm system codes.
- Hire a cleaning crew or clean the house yourself. Although the seller is required to make the home presentable, they are not required to make it spotless.
- Paint as soon as possible, since it is easier to do so before you bring in your belongings or install new carpet.
- Change your address with the post office.
- Think ahead about any repairs and schedule any work as soon as possible.
- After a few weeks, confirm that the transfer of property has been recorded with the local municipality.
Setting Up a Home Maintenance Schedule
Now that the home is yours, you’re responsible for the upkeep. Ignoring small problems can have big consequences. Hopefully your home inspector gave you a clear picture of the condition of the home and what might need to be replaced soon. A great way to stay on top of things is to set up a home maintenance schedule. It will take the guesswork out of what needs to be done next. It’s easy to set up a paper or calendar on your computer with reminders so that you will stay on track.
To start, figure out the tasks that need to be done around your home. The gutters may need to be cleaned 2-4 times a year, depending on your location. The dryer vents may need to be cleaned twice a year to prevent fire. You may need a termite inspection once a year. It can also work for the smaller tasks, like cleaning the refrigerator once a month. Assess your home as you move in and make a list. Hopefully it will help to keep small problems from becoming large, costly ones.
Securing a Home Equity Loan
There are two types of loans that you can take against the equity that you have in your home, a home equity loan and a home equity line of credit (HELOC). Both types of loans can be invaluable tools for making home improvements or paying off credit card debts, because they typically have lower rates than credit cards. Both also put your home at risk if you are unable to make the required payments. To get the best deal, shop around for the best rates, ask a lot of questions and negotiate the fees, if possible.
A home equity loan is more like a regular loan, where a lump sum is issued and the borrower pays it back in installments over a fixed period of time. It’s like a second mortgage but it is repaid in a shorter period of time.
A home equity line of credit (HELOC) is a revolving line of credit, like a credit card. The bank issues checks associated with the HELOC but the borrower does not pay interest until a check is written and money is borrowed. Some use it as a safety net against unexpected expenses; others use it as they would a regular home equity loan. As the borrower pays back the money, they are able to borrow it again, as needed.
Key Takeaways:
Understanding Closing Costs
Closing costs, which are often unexpected by first-time buyers, average 3-5% of the sale price and comprise a variety of fees. If a home costs $300,000, closing costs will be between $9,000 and $15,000 with the full amount due at the final meeting.
The lending institution will send you a Loan Estimate within 3 days of the submission of a loan application which will explain all of the costs associated with your loan. It is only an estimate and can legally change up to 10%. You should also receive the Closing Disclosure statement detailing all of the closing costs charged by your lender 4 days prior to closing. Compare this to your Loan Estimate and ask any questions about differences.
Always take the opportunity for two walk-throughs, especially if the property has been vacant. This is your chance to double check the plumbing, electrical and climate control. On the first one, you can confirm that any agreed-upon repairs have been made. If not, you may need to renegotiate or delay the closing.