The number one thing you need to buy a home is money, right? While a good job history and decent credit score are also some major factors that contribute to the home buying process, closing costs are a biggie! Yet they seem to still be a mystery for most people that are purchasing a home. Why is this? Because final closing cost numbers are a different number for each transaction.
Shelby Barrett, a local Denver loan officer with Fairway Independent Corporation (NMLS #1550402) helped us break down each of the moving parts and why you pay them.
When you purchase a home, the total ‘Cash to Close’ will equal the down payment plus ‘closing costs’. But what are closing costs and why do you have to pay them?
BREAKING DOWN 'Closing Costs':
Closing costs occur when the title of property is transferred from the seller to the buyer or when a mortgage is refinanced. The total dollar amount of closing costs depends on where the property is being sold and the value of the property being transferred. However, as a rule of thumb closing costs are typically between 1-2% of the total loan amount.
Examples of Closing Costs:
Origination fees: fees charged by the lender for the creation of a loan. These will vary greatly from lender to lender!
Discount Points: The buyer can purchase discount points up front to reduce the interest rate. This is also referred to as ‘buying down the rate’.
Credit Report Fees: Lenders require a credit report as part of the application.
Title insurance fees: Title insurance protects the lender from claims against the house and protects the buyer from past contractors making claims against the property.
Appraisal Fee: Lenders require an appraisal, this fee will vary greatly from lender to lender and state to state.
HOA Fees: if the home is managed by a Homeowners Association they may charge move in fees, up front dues, etc.
Prepaids: In Colorado these are a large portion of your total closing costs. ‘Prepaid’ items are not fees, rather, costs that will be incurred throughout the year paid upfront at closing. These will vary greatly per property and vary on the time of the year you close on your home. Examples, prepaid interest, homeowners insurance, property taxes and mortgage insurance and HOA dues.
Investopedia.com revealed that the average closing costs in Colorado are the 12th highest of all the states (average is $1847.00). “The following average closing costs are based on the purchase of a home valued at $200,000, with a 20% down payment. In Colorado, homebuyers pay an average of $1,192 for lender fees, and $719 for third-party fees for total average closing costs of $1,910.”
Now don’t forget about your down payment! This will also be due at closing but isn't considered part of the closing cost terminology. This is where most people get a little confused because lets get real; we just want to know how much money we need to close on our dream home! So when you are asking your lender how much you need for closing costs please remember there are a few outliers when it comes to out of pocket expenses: inspection, sewer scope, radon test, survey or ILC + appraisal, to name a few.
If you would like more specifics about you closing costs please feel free to reach out to me for more details. firstname.lastname@example.org