When buying a home, you will find that the down payment is not the only thing you have to pay. Closing costs also need to be paid. Even though many buyers are aware of this, they are often surprised at how big the bill is.
These costs can easily shock you, as they come at the end of the sale/purchase process and it is not always clear what you are paying for.
Find out what to expect in Alabama, the closing price of the property to buyers below.
What does closing on a house mean?
If you are going to buy or sell your property, you should familiarize yourself with such concepts as closing.
Closing is the stage when the house is put up for sale, and the money with the documents is transferred to the buyer for registration of ownership of the property.
If both the buyer and the seller fulfill the agreements entered into in the contract, the transaction is considered a successful closing.
Typically, people choose to sell their house with a realtor but they also sell without a realtor or FSBO (for sale by the owner).
Most often, closing is performed by a third party who guarantees that all the money, documents, and other items needed to close the sale will be properly exchanged.
What are closing costs?
Closing costs are fees that are paid by both buyers and sellers at the close of a real estate transaction. These are fees imposed by the people making your purchase, including your lender, real estate agent, and other third sides engaged in the operation.
In general, costs can range from 1% to 7% of the total price, but most often sellers usually pay from 1% to 3%.
As there are different fees and legal requirements for each state and municipality, closing costs vary across such a wide range. According to the report Bankrate.com, Alabama ranks as the 11th most expensive home loan closure in the country.
What is included in closing fees?
When we are already familiar with what the closing fee is, the question arises: What expenses does it cover? It is worth noting that both the buyer and seller will have to pay for some services.
Although certain expenses are usually paid by one or the other party, payment details can be settled between the parties via negotiation in this way, the buyer can reach the agreement with the other party so that the seller can pay part of his/her closing costs in exchange for some concessions on the part.
Typically, expenses include fees charged by lenders, as well as third-party fees for services such as valuation. The average closing cost of a $200,000 home loan transaction in Alabama is $2,613, $1,967 of which is as a fee for issuing the loan to the lender and $646 as a fee to third parties.
Note that these values are based on sample data. Your closing costs may vary depending on your lender, the size of your loan, and whether you pay in cash or not.
To familiarize yourself with these charges in detail, let's take a look at common closing costs you can expect to encounter in Alabama.
When buying a property, you need to be sure that you own it freely and without any claims. This ensures that you are the rightful owner of the property and that there are no outstanding loans or court decisions regarding this property.
In Alabama, the average cost is between $ 300 and $ 600, and it is often divided between buyer and seller at $ 150-300 each.
The seller and buyer usually receive their own title insurance policies, which help protect them in the case of a title issue after the transaction closes.
Thus, title insurance protects you in case there are any title issues in the future after closing. The cost varies greatly with the purchase price and the loan amount, while the average cost is $1,000.
This report checks whether the property is worth as much as the seller borrows from the lender. This is a prerequisite if you are getting a mortgage, and there is no way around it. Therefore, almost all lenders require an assessment.
You usually have to pay the bills, and for a typical home in Alabama, it costs about $ 450. Consider paying a few hundred dollars if you don't include it in the closing price and don't force the seller to pay your expenses. Find an appraiser here.
Escrow fees are paid to individuals or companies that perform the escrow function. An escrow is a neutral third party that holds documents and funds in trust with the aim of boosting the closing of a contractual transaction between two or more parties.
This fee ranges in diapason from $ 500 to $ 800 in Alabama. However, the cost is often divided between the buyer and seller. Find Escrow services here.
Loan payoff fees
This includes application and estimated fees, prepaid interest, and loan origination fees. In Alabama, you can expect that the biggest part of your closing costs will go to the commission for the issuance of mortgage loans. This fee is usually about 1% of the loan amount.
Loans in many states require a survey that determines the legal boundaries of ownership. This fee is not always necessary, depending on your property or preferences. In most cases, this can be paid outside of closing time. In Alabama, the cost can range from $ 350 to $ 500.
And last but not least, depending on the local laws and laws of the state you will be charged taxes when the transaction of purchase and sale. They are calculated based on the value of the property and local laws.
For instance, taxes for transfer in Alabama are $ 1 for every $ 1,000 of the sale price. In many states, the seller usually pays the transfer tax, but in Alabama, this responsibility falls on the buyer.
In Alabama, buyers and sellers pay an average of $ 218 in taxes combined for closing. This accounts for 9.02% of the total average closing cost in Alabama.
Closing the house covers some other expenses like attorney fees, origination fees, discount points, etc. that are mostly optional. However, if you do not pay for these expenses, then in an emergency like a pipe break, you will have to be responsible for paying the bill.
You must also pay for current expenses such as utilities, property taxes, and homeowners association dues.
That's why before buying a house, you should make sure that you have enough money for various services and even in reserve in case of unforeseen situations.
If not, it is better to save up, because otherwise, you may not be able to handle all the costs and eventually lose the right to buy out. But with a little planning and the right advice, you can fulfill your dream of homeownership.
How to calculate closing costs?
Assumption precisely how much money you will need to close fees can be disconcerting, and especially if you are purchasing a home for the first time, therefore you may need some help evaluating closing costs.
When you are acknowledged of what's going to happen in advance, it gives an opportunity to mentally and financially prepare for the closing process.
To get an estimate of your fees, you can use the closing costs calculator. It breaks your closing costs down into five categories: property-related fees, loan-related fees, mortgage insurance fees, property tax and homeowner's insurance, and title fees.
The calculator may guide you to get an idea of the costs you will face at closing. Furthermore, it also can assist you to understand what kind of savings you'll need at the closing table. Here is a free online closing cost calculator.
In the case that you want to know more accurate figures and assumptions, please contact your real estate specialist to purchase.
A professional who is well versed in this area and familiar with the prices in your state will help you calculate the potential amount of your expenses that you will need in the closing process and help you prepare the necessary documentation.
How to lower closing costs?
Closing costs can reach really large amounts when buying a home, which can certainly cause additional financial problems.
Even with small savings, you can spend this amount on the arrangement of your new home. Therefore, here are some strategies that you can follow to reduce your closing costs.
Negotiate closing costs
You should try to negotiate a reduction in some of the closing costs. The lender may be willing to lower the fee they charge themselves and make some concessions.
For example, they may include a loan origination fee and an underwriting fee. The lender may also be willing to take on some of the smaller costs, such as the credit check fee.
This is why it is so important to have a lawyer who will advise you during the registration process.
A good buyer's agent ensures that you get everything you deserve and even come out ahead by comparing fees and service charges from more than one lender.
Look for programs
Look for a loyalty program. Some banks offer help with their closing costs to buyers if they use the Bank to finance their purchase. Bank of America, for example, offers reduced loan origination fees for preferred members.
If you are eligible, you can qualify for assistance in the amount of 3% of the initial payment. Generally, you should have a good credit rating and will need to meet the income and purchase price restrictions. Alabama also offers Mortgage Credit Certificates (MCC).
You can use them to get a Federal tax credit of between 20% and 50% of your mortgage interest.
Have the seller pay closing fees
Sellers who are very eager to close a deal soon sometimes agree to contribute money to your closing costs.
Your lender may pay a commission for you in exchange for a higher interest rate on your mortgage. Most loans allow sellers to Deposit up to 6% of the sale price to the buyer as a closing credit. This is a way to seal the deal and a tax-free expense for the seller.
Note that when housing inventories are low and buyers are competing for homes, sellers may be less likely to make such concessions. However, make sure you know what these different financial configurations will ultimately cost you in the long run.
Apply for an FHA loan
Lower-income Americans can apply for an FHA (Federal Housing Administration) loan, a government-backed mortgage. Buyers can get a little help from interested third parties, including real estate agents, sellers, and mortgage brokers, who can pay up to 6% of the new loan amount.
FHA loans are also slightly weaker on credit scores. Borrowers with a credit score of 580 or higher are likely to qualify, while traditional lenders require a credit report to reflect 620 or higher.
Nevertheless, it is worth noting that not all expenses can be avoided and a certain level of closing costs will remain.
So, one way or another, you'll end up having to fork out and pay for them. Your main goal is to minimize the damage and stay in the house long enough for them to be worth it.
Summing up, we can conclude that everyone deserves to have a clear idea of the fees that they will pay at the end of the sale of the house.
And always remember that buying a home is always a serious process that requires you to take responsibility. If you want this process to go without problems and additional stress, then you should have some savings in stock. And also use a special calculator in order to be prepared.
I hope this will help clarify the closing price and give you the information you need to buy/sell your home confidently.
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