Do you need to pay closing costs? Are closing costs necessary? Today, we’re going to discuss everything you need to know about closing costs, if and when you need to pay them, and how you can manage or potentially save money.

We’ve seen more questions and variations in closing costs than ever before. For instance, one request was for $35,000 in closing costs. Sounds enormous, right? Well, let’s break it down and understand why it’s important to be informed about these costs.

Closing costs are an important step in finalizing a property purchase. To help you understand this, here’s an outline of what closing costs can cover and how they are applied. The seller’s contribution to closing costs is a key element. It specifies the amount the seller agrees to contribute, which can be applied in several ways at the buyer’s discretion:

1. Permanent or Temporary Reduction. A permanent Reduction means using the seller’s contribution to lower the mortgage interest rate for the life of the loan. For example, reducing a 7% interest rate to 6.25% on a 30-year fixed loan. On the other hand, the Temporary Reduction, also known as a mortgage buy-down, temporarily lowers the interest rate. For instance, you might have a 5% rate in the first year, 6% in the second year, and then it reverts to the original 7% rate.

“Closing costs are an important step of finalizing a property purchase.”

2 Mortgage Financing Costs. These include costs such as points charged by the lender. For example, on a $500,000 loan, if the lender charges two points, that’s $10,000. Loan officers typically earn from both upfront fees and the interest rate, so comparing rates on the same day from different lenders can be beneficial.

3. Closing Costs. This category includes a variety of expenses, such as appraisals and lender fees. Different loans and lenders may have specific requirements and fees that fall under closing costs.

4. Prepaid and Escrows. These are funds held for future payments like property taxes and insurance. While not as common, they can be part of the closing cost agreement if the lender permits it.

5. Unused Portion. Any unused portion of the seller’s contribution can often be applied to reduce the purchase price of the property, ensuring the funds are utilized efficiently.

Understanding closing costs is needed for both buyers and sellers. For buyers, these contributions can make a home more affordable by reducing upfront costs or lowering the mortgage rate. For sellers, offering to cover closing costs can attract more buyers, especially in a competitive market.

Even on my own properties, I consider covering closing costs if it facilitates the sale. It can be beneficial because rejecting one buyer’s request might lead to missing out on several potential buyers.

I hope this helps clarify closing costs, their purpose, and how they can be managed. If you have any questions about fees, costs, or prices, please let us know. Give us a call or an email!