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Before buying a home, identifying your price range is important. However, a home’s price isn’t just what’s listed with the real estate agent. The total price also includes the amount for both closing costs and your down payment. Let’s break down what closing costs and down payments are and how they can impact the purchase of your dream home.

Closing costs

When closing on your mortgage, you will most likely be responsible for closing costs. These costs come from creating the loan, home appraisals and searches on your home title, along with other administrative fees such as payments to the home inspector. Paying your closing costs is officially when the property title is transferred from the seller to you as the buyer.

Sometimes, you can negotiate the closing costs so the seller pays for them, but often they are split between the seller and buyer. Typically, closing costs are anywhere from 3% to 6% of your total loan amount. Closing costs are not included in your down payment, which is a separate payment on your mortgage. When negotiating the closing costs, be aware that the seller may have the upper hand if it is a seller’s market or if they choose to negotiate the final sale price to cover their portion of the closing costs.

Down payments

A down payment is a portion of your loan that you pay upfront for the home. It makes up a percentage of the home loan, and the rest of the mortgage is what is financed. The bigger a down payment you can make, the less interest you’ll pay over the life of your loan, the less you’ll have to borrow and the less your monthly payments will be. Traditionally, 20% of the total mortgage was required to be paid as a down payment, but that isn’t the case anymore. Nearly 60% of homebuyers said they put down less than 20% on their home purchase according to a recent survey¹, with the lowest amount accepted by banks being 3%. Today, there are a number of mortgage options that don’t require such a large down payment. If you’re a first-generation homebuyer, you may also qualify for down payment and closing cost assistance programs. Other programs are available as well, and your mortgage loan officer can assist you in finding and understanding them.

While closing costs and down payments can feel like a hurdle in the race to purchase a home, working with your mortgage loan officer will help. They will be able to tell you when to negotiate and how an assistance program could potentially help you. Buying a house is one of the biggest purchases you will ever make, and it can feel stressful, but being prepared will help!