Closing costs are probably one of the most confusing parts of buying a home, whether you buy an existing property or are building a new home. The fact is that closing costs can add thousands to both the buyer and seller’s expenses during a transaction. These fees include items like mortgage origination fees, owner’s and lender’s title insurance, escrow or settlement fees, transfer taxes, and government recording fees. However, builders sometimes offer incentives to buyers if they use a preferred lender which means closing costs may be lower than for the purchase of an existing home.
What Are Closing Costs?
The first thing to understand is exactly what closing costs are when you decide to purchase a home. Closing costs are the fees, charges and related expenses with the closing of the sale of a property. In most cases, closing costs are split between the buyer and seller. When you agree to a mortgage loan, your lender will give you a closing disclosure form which will explain what the closing costs may be. About three days before closing, you will receive a closing disclosure statement that will provide the actual amounts you will pay for closing which may be different than the initial cost should things have changed during the loan process. It is recommended that you compare the two documents to be sure there are no discrepancies.
How Much Are Closing Costs?
Closing costs vary depending on the total amount of sale but normally range between 2 and 5 percent of the total price. If your new home will cost $300,000, you can expect to pay between $6,000 and $15,000 in total closing costs. These are broken down into mortgage loan origination fees, home inspection fees, home appraisal fees, title search fees, attorney fees, home property insurance fees, points, credit agency fees, escrow fees and recording fees.
New Construction Closing Costs
New construction homes often have additional closing costs than when you purchase an existing home. Closing costs can fluctuate based on the timing of locking new construction interest rates, the structuring of the new construction escrow account and other fees associated with construction closing costs. One of the biggest variables is the owner’s title policy. When you purchase an existing home, the seller normally covers this cost but when you purchase new construction, you will be responsible for the title policy. Many builders offer a credit at closing to cover the fee or issue a predetermined credit comparable to the cost.
There are builders who will offer closing cost discounts if you use one of their preferred lenders. If a builder offers such a discount, you will more than likely not be able to access the discount unless you use the suggested lender. You can do your own research to determine if another lender may offer options that would offset the preferred lender discount, such as a lower interest rate. Keep in mind that you will probably have to meet with the builder’s lender even if you choose another as many builders require pre-approval before they will enter into a contract to build the home. One reason builders use preferred lenders is so they can keep an eye on the loan process. You can also use the information you get from other lenders to negotiate with the builder’s lender.
Who Pays What Costs?
In addition to title insurance, there are other fees you may have to pay at closing that is normally paid by the seller when you purchase an existing home. Transfer taxes may also be the responsibility of the buyer and those fees, combined with title insurance, could add thousands to your closing costs. If your new home will be built in a development, you may have to pay Homeowner Association (HOA) transfer fees that may range between $700 and $900. If your home is not fully completed when an appraisal is conducted, your lender will require a final inspection. This inspection must be provided to the lender before the loan will be funded. This is to confirm that the house is complete and costs an average of $175.
New Construction Escrow
Another closing cost unique to new home construction is the new construction escrow account. Depending on how the escrow account was set up at closing, you could face a significant increase in monthly payments after the first year. Be sure that the lender sets the escrow up based on estimated property taxes for the improved property, or the sales price, and not on the unimproved property, or lot value. Doing so may result in an escrow account surplus but it will ensure that your future payments are comparable after an escrow analysis is completed.
If you are considering the purchase of a newly constructed home, contact Southdown Homes today. You can reach us by calling 610-873-1900 or visit our website to learn more about The Southdown Experience.