Budgeting for Closing Costs

Buying a home is a big financial investment, but did you know there are additional costs associated with getting a mortgage loan besides the down payment and monthly mortgage payment?

One of these expenses is closing costs. Closing costs have to be paid before you close on your home, and include things like property taxes, homeowners insurance, title search fees, and appraisal fees. Closing costs also pay the people who’ve performed services throughout the loan process, like the appraiser and your real estate agent.

It’s important to know that while they’re called closing costs, you may be asked to pay some of them as the action happens. For example, you may have to pay for your home inspection when the inspector finishes.

All of your closing costs will be itemized and given to you at closing, but don’t hesitate to ask your mortgage banker or agent to clarify if something doesn’t make sense or doesn’t look right.

Who pays for closing costs?

As a homebuyer, you can negotiate with the seller when it comes to who covers closing costs. Sometimes, the seller may cover all of your closing costs, but every loan has different guidelines about how much a seller can pay. Talk to your mortgage banker to learn your options.

Budget for closing costs

If you’re going to have to pay for some or all of your closing costs, it’s important to remember to include that sum in your budget.

Estimate your closing costs

Generally, closing costs are 2% to 6% of your purchase price. So, for a loan of $150,000, your closing costs may range anywhere from $3,000 to $9,000. You can do this simple calculation for yourself and see about how much you’ll need for closing costs. Your mortgage banker should also give you a document after you apply for your loan that breaks down your interest rate, monthly payment, taxes, insurance, and closing costs. The closing costs listed on that document may change a bit throughout the process, but it will give you a good idea of what to expect.

Save a little extra each month

It may seem obvious that you’ll need to save for a downpayment for your house, but you should also set some cash aside each month to cover other expenses associated with buying a home. Yes, this includes closing costs, but it can also cover other unexpected expenses, like emergency repairs.

Getting into the habit of saving is a good practice to keep up, even after you purchase your home.

Do you have enough saved to replace your hot water heater if it breaks? What if the roof starts leaking after a big storm?

Savings tips and tricks

When setting any type of budget, look at your current spending habits and see where you can make cuts. Do you eat out a lot? How often do you online shop? (Don’t worry, we all do it.) See where you’re spending a little more than you need to and try cutting back. Even if it’s only an additional $50 to $100 a paycheck, saving a little extra money every month will add up.

Set aside your tax return or bonus. Saving can be hard, but try putting any unexpected or extra money you receive directly into a savings account. Out of sight, out of mind!

Cut the cable cord. With streaming and online options, it’s easier than ever to watch your favorite shows and discover new ones without cable. Choose a subscription service instead and slash your TV expenses.

Eat at home. Your morning Starbucks and eating out for lunch is great, but it comes at a price. Try packing your lunch and brewing coffee at home before heading to work and see how much money you save.

Cut down on your energy consumption. Turn off the lights when you leave a room, lower your thermostat, and decrease the temperature of your hot water heater to save a little on your utility bills.

While you won’t necessarily have to pay closing costs for every loan, it’s a good idea to save for hidden costs associated with home buying and home owning. By making a few small changes, you can start to save a little extra money every month so you always have a little money set aside in case of a home-related emergency.