Budgeting for closing costs
The anticipation of becoming a homeowner for the first time is exciting. After years contemplating renting vs buying, saving and paying down debt, you're finally ready to close the deal on the home of your dreams. But even with all the budgeting you've done, closing costs are often that extra expense that could take you by surprise if you're not prepared.
What are closing costs?
Closing costs are fees that must be paid in order to close your loan. While items can vary widely depending on where you live, the type of home you buy, charges that typically go into your total closing costs include miscellaneous administrative and processing fees, escrow and recording fees, tax and title services, certifications, and inspections.
How much should I expect to pay in closing costs?
According to Zillow.com, home buyers should expect to pay between about 2 and 5 percent of the purchase price of their home in closing costs. So, if your home costs $150,000, you could pay anywhere between $3,000 and $7,500 in closing costs. However, on average, Zillow reported homebuyers pay approximately $3,700 in closing costs.1
Can I avoid some or all of my closing costs?
It depends. Although it's typically the home buyer who foots the bill for the closing costs, it's not unrealistic to make a deal with the seller to either split or pay a portion of the total closing costs - especially if it's a deal breaker.
There's also something called a no-closing-cost mortgage, where you can actually avoid paying closing costs altogether. However, the tradeoff is often paying a higher interest rate. For example, your lender may offer you a mortgage rate of 3.50 percent, or give you the option of paying zero closing costs (a no-closing-costs mortgage) but offer it to you at a higher rate such as 4 percent or higher. This type of mortgage loan might be a good choice if you don't have enough cash to cover all of your closing costs upfront and if it means the difference between being able to buy the home you've set your heart on and letting it go to another buyer.
A good rule of thumb when shopping for your first home is to always create a budget for buying a house, build a buffer into your budget, and plan ahead for unexpected costs. To get a better idea of what you may be looking at concerning closing costs, you can try myFico's closing cost estimator.