Understanding Closing Costs and How to Budget for Them

Buying a home is a seriously exciting time, but as exciting as it is: it’s terrifying. Let’s face it, it’s the biggest decision you’ll face and by far the biggest investment you will be making in your life. It isn’t just about saving for the down payment either, there’s also closing costs.

What are closing costs, I hear you ask. Essentially, they’re miscellaneous costs such as attorney fees, taxes, title insurance, appraisals, surveyors, and more. To help you get a better idea of what you should expect from closing costs, keep reading!

The average closing costs are a percentage of your new home’s purchase price, usually between 2 and 5%. So, if you are purchasing a $180,000 home then your closing costs will run around $4,500. The closing costs can be as high as 8%, but it’s important that you realize nobody chooses the specific number. The costs just add up to a percentage.

Your lender will provide you with an estimate, known as a Good Faith Estimate, of the closing costs on particular homes. If they don’t offer it, ask! The day before you close, you’ll need to ask your lender for the Settlement Statement. The Settlement Statement is the final form, complete with all of the sale numbers, which includes the total and final closing costs.

Every situation is different, so even if you use an online calculator it isn’t the same as speaking to your lender. However, when your lender provides you with a Good Faith Estimate, you can compare it with the online calculate to determine if there are any figures that seem out of the ordinary.

You would be wise to roll the closing costs into your mortgage. If you don’t have enough money to cover the closing costs, you can have it included in your loan amount. For instance, your loan is going to be $150,000 but you’re expecting closing costs of $3,700 so you choose to borrow 153,700.

If this sounds like a great idea to you, there are two things you need. You need to be able to qualify for that slightly larger loan (though, the bank shouldn’t have an issue with a few extra thousand). Additionally, your loan amount can’t exceed the LTV. The LTV is a loan to value ration. The LTV is the amount of the loan in comparison to the home’s value, which is based on the appraisal. So, if the home has been valued at $100,000, and the bank is prepared to offer a loan of 95% LTV, they’ll loan you $95,000. You may find that your credit isn’t sufficient for that large a loan, and it may only be 80% LTV, so the loan will be just $80,000.

It’s important that you don’t confuse the home’s price with its value. The bank works on the value, based on the appraisal. You may be paying more (or less) than the value from the appraisal. So, if you want to roll your closing costs into the mortgage your loan amount can’t exceed the LTV.

It’s not uncommon for people to request the seller to cover some, or all, of the closing costs. Alternatively, you can ask the lender about covering the costs. It will require a higher interest rate on your loan, though.