Understanding Closing Costs

Purchasing a home is one of the most significant financial decisions you’ll make. Many people delay discussing the final steps with an attorney until the last minute, focusing instead on shopping around and selecting the right mortgage company. Although becoming a homeowner is thrilling, the process can be complex and sometimes confusing. A crucial aspect of this journey is understanding closing costs. By familiarizing yourself with these components, you can approach your home purchase with greater confidence.

What Are Closing Costs

For many people, buying a home is one of the most significant purchases they’ll ever make. Transactions of this magnitude often involve more complexity than simply exchanging money for a property. Typically, a real estate deal includes several parties, such as the realtor, inspector, and lender, each of whom charges fees for their services. These additional expenses, known as closing costs, add to the overall cost of the property.

Both buyers and sellers should anticipate closing costs. Sellers usually cover fees such as real estate commissions, which generally range from 3-6 percent of the sale price. If you’re planning to sell a property, be sure to include these costs in your financial calculations. As a buyer, you’ll need to budget for expenses like appraisal fees, attorney fees, title insurance, and more. Remember, each real estate transaction is unique, and your contract will specify who is responsible for each cost item.

What You’re Covering Costs For

As noted, closing costs are a standard part of finalizing the purchase of a house or other property. It’s important to remember that these costs can vary depending on the property’s location. Here are some of the most common closing costs you can anticipate in your real estate transaction:

Application Fees
When buying a home, many buyers secure a mortgage through a lender, such as a bank, credit union, or private non-bank lender. The process starts with an application where the lender reviews your credit and financial history. To cover the costs of this review and administrative work, lenders often charge an application fee. Keep in mind that paying this fee only applies for the loan application itself and does not guarantee loan approval. Most lenders will waive this fee if your application is denied.

Appraisal Fees
Determining the true value of a home goes beyond simple supply and demand; it involves assessing various factors. An appraisal evaluates the property’s worth based on its location, condition, age, and other relevant aspects, along with recent sales of comparable properties. A licensed real estate appraiser conducts this assessment and provides a detailed report on their findings.

Attorney Fees
Given the significant financial stakes in buying or selling a home, legal expertise is essential. A licensed real estate attorney typically reviews the property transfer contract to ensure it is airtight and protects against any potential loopholes. They also facilitate the transaction and help you understand the details. Attorney fees are generally included in your closing costs.

State Taxes
Similar to vehicle purchases, state governments are interested in real estate transactions. State transfer taxes are often part of the closing costs and are distinct from ongoing property taxes. Unlike property taxes, which are paid annually as long as you own the home, transfer taxes are a one-time fee calculated based on the purchase price of the property and intended occupancy.

Escrow Fees
Many lenders offer escrow services, which involve adding a portion of your monthly loan payment to cover property taxes and insurance premiums. Escrow fees can vary among lenders, with some requiring them and others not. If you choose to include taxes and insurance in your escrow account, your lender will collect a portion of the annual cost each month. Note that funding the escrow account requires additional funds at closing, typically covering the first month’s escrow contribution. Once your mortgage is underway, the escrow amount will be included in your monthly payment and adjusted for any changes in property taxes or insurance costs.

Your transaction may involve additional closing costs, such as origination fees, inspection fees, and title fees, which vary depending on your location and the specifics of the transaction.

How Much Will It All Cost?

Although costs and fees can vary significantly, you should anticipate paying approximately 2-4 percent of the home’s purchase price in closing costs. To get a rough estimate, multiply the home’s price by 0.06. For instance, if the home costs $1,000,000, you can expect to pay between $20,000 and $40,000 for closing costs and prepaid items.

Conclusion

It’s often possible to lower your closing costs when buying a home. Many buyers, feeling overwhelmed by the home purchasing process, may overlook the details of closing costs, which can seem complicated. However, reviewing the breakdown of each fee and exploring alternative options can be beneficial. Taking the time to understand these costs can help you find ways to reduce them.

Generally, it would cost a lot for the buyer and seller when it comes to closing costs. If you’re looking to sell your property and want to avoid closing costs. reach out to Illinois Real Estate Buyers today to get a no obligation cash offer on your property today.