If you are planning to purchase a home, one of the most important parts is getting your budget in order. However, if you are going to budget accurately, you must ensure that you have accounted for all the expenses of buying a home. Some of the numbers are straightforward, such as your downpayment amount or the property's asking price. However, others are trickier to nail down - especially closing costs. These have been leaving buyers stumped for years, so with that in mind, here is our Knoxville home buyers guide to closing costs!
What Are Closing Costs?
The first step in our Knoxville home buyers guide is explaining what closing costs are! Closing costs can cover a variety of different fees and expenses. Simply put, they are the costs over and above the property price incurred to complete the purchase. Some of the expenses included in closing costs can include the following:
- Loan Origination Fees
- Appraisal Costs
- Title Searches
- Title Insurance
- Survey Costs
- Tax
- Deed Recording
- Real Estate Commissions
Who Pays The Closing Costs?
Many people associate closing costs with the buyer, but the next point in our Knoxville home buyers guide is that both the buyer and the seller will be responsible for some of the closing costs. Who pays each fee can be negotiable, but the seller usually pays any real estate commission and title transfer costs. At the same time, the buyer covers mortgage fees and the cost of appraisals and inspections. Since both buyers and sellers may incur closing costs, knowing who will cover the various expenses is important. It is required by law for the lender to issue a disclosure statement 3 business days before the closing date detailing all closing costs.
How Much Should You Budget For Closing Costs?
The next question we need to answer on our Knoxville home buyers guide is how much you will need to budget to cover the closing costs. There is no hard and fast rule, and the amounts will vary, but a great rule of thumb to follow is budgeting for between 2% and 5% of your home loan amount. Your lender should issue a loan estimate within three days of your loan application, including an estimate of the closing costs, the interest rate, and monthly repayment. These costs are subject to change, but the final closing cost should be reasonably close to this estimate. A minimum of 3 business days before the closing date, you should receive the closing disclosure with the final amount and a detailed breakdown of the costs.
Can I Negotiate?
You may be able to negotiate some closing costs, including attorney fees, recording costs, and messenger costs. In some cases, you may even be able to negotiate with the seller for them to cover some of the buyer costs as part of the deal. However, you should be aware that in competitive markets, sellers are unlikely to agree to this. It is really only possible if the buyer needs to sweeten the deal to push a sale through if they are having difficulty selling the property.
When Do I Pay The Closing Costs?
You will need to be prepared to pay the closing costs when you sign the documents for your loan and officially take ownership of your new home. It is standard practice to wire the funds to an escrow account or pay using a cashier's check.
Examples of Closing Costs
To round up our Knoxville home buyers guide to closing costs, let's take a look at some examples of the different fees that might make up your final total and what they are for. These can include the following:
- Loan-Related Costs - These fees are associated with obtaining a mortgage and may include application fees, loan origination fees, credit report fees, and points (prepaid interest).
- Appraisal Fee - Lenders typically require an appraisal to assess the property's value and determine if it's worth the loan amount.
- Home Inspection Fee - While not always mandatory, a home inspection is highly recommended to identify any potential issues with the property.
- Title Insurance - This insurance protects both the lender and the buyer in case there are any issues with the property's title or ownership rights.
- Attorney or Escrow Fees - Some states require an attorney to be present at the closing to ensure all legal aspects are handled correctly.
- Recording Fees - These fees cover the cost of recording the home sale and ownership transfer with the local government.
- Property Taxes - Depending on the timing of your purchase, you may need to reimburse the seller for property taxes they've already paid.
- Homeowners Insurance - Lenders often require proof of homeowners insurance to protect their investment in case of property damage or loss.
- Private Mortgage Insurance (PMI) - If you put down less than 20% of the home's purchase price, you may be required to pay PMI to protect the lender in case of default.
- Prepaid Interest - Buyers often need to pay interest on the loan that covers the time between closing and the first mortgage payment.
- HOA or Condo Fees - If you're buying a property in a homeowners association (HOA) or condominium, you may need to pay any applicable fees.
It's important to note that closing costs can be significant, typically ranging from 2% to 5% of the home's purchase price. As a buyer, it's essential to budget for these costs in addition to your down payment and other moving expenses. Before closing, you'll receive a Loan Estimate (LE) from your lender, which outlines the estimated closing costs. Review this document carefully and ask your lender any questions you may have to understand the costs involved fully. Additionally, you can shop around for certain services, like title insurance and home inspections, to potentially find better deals and reduce some closing costs.
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