Escrow and closing costs are part of nearly every home purchase and often cost more than buyers expect. Understanding how these costs work helps buyers prepare for closing and avoid surprises.
How can I save on closing costs
Studies show that closing costs can average two to three percent of a home’s purchase price. However, buyers do have options.
For example, buyers can negotiate with the seller to pay all or part of the closing costs. The lender must agree to this arrangement.
Buyers may also consider a no point loan. The trade off is a higher interest rate, and some of these loans include prepayment penalties. Still, buyers who are short on cash may reduce upfront costs this way.
Another option is a no fee loan. In most cases, the lender wraps fees into a higher interest rate, which lowers the amount of cash needed at closing.
Some buyers pursue seller financing. This type of arrangement often avoids traditional loan fees.
In addition, renting the property with an option to buy can give buyers more time to save for upfront costs.
Finally, buyers should shop around. Each lender and mortgage broker has a different fee structure, so comparing options can lead to savings.
Who pays the closing costs
Closing costs may be paid by the buyer or the seller. In most cases, local customs and negotiation terms determine who pays.
What are closing costs
Closing costs are fees for services, taxes, and special interest charges related to buying a home. These costs include loan points, title insurance, escrow or closing fees, document fees, prepaid interest, and property taxes.
Unless these charges are rolled into the loan, buyers must pay them at closing.
Where do I get information about closing costs
For more information, buyers can request the Consumer’s Guide to Mortgage Settlement Costs from the Federal Reserve Bank of San Francisco. Buyers can also ask their lender or real estate agent for details early in the process.
Why do I need a title report
A title report helps confirm that no liens or restrictions affect the property. Even when a home appears clear, title issues can exist.
A preliminary title report allows buyers to review any problems before closing. This includes liens, restrictions, and ownership interests.
The most common form of ownership is fee simple, which represents the highest level of ownership interest. The report also lists exceptions not covered by title insurance, such as zoning laws or easements. Buyers should review these items carefully before closing.
