In real estate, the true cost of buying a home is always higher than the home’s purchase price itself.
This is because of service charges from governments, lenders, and title/escrow companies.
Because there is no such thing as “typical” closing costs because each home purchase is different, home buyers should remember that the actual cost to purchase a home is a mathematical formula:
(Home Purchase Price) + (Closing Costs) = (True Cost To Purchase Home)
So, if a home is purchased for $250,000 and the costs are $5,000, the true cost to purchase the home is $255,000.
If the buyer is using a mortgage to finance the home, the mortgage is not based on the true cost, however. It’s based on the home’s purchase price. This means that a person making a 20% downpayment is actually paying 20% plus whatever closing costs are listed on the final settlement statement.
Therefore, the home buyer’s required cash at closing would be 20% of $250,000 ($50,000), plus $5,000 in closing costs. That adds up to $55,000, or 22 percent of the purchase price.
That said, the monies required at closing are usually reduced by credits paid from the seller to the buyer. We’re going to ignore them for purposes of discussion because these types of offsets are inconsistent and can vary wildly from purchase to purchase.
They come in the form of “seller tax credits” and/or “seller concessions” and we’ll cover those two concepts another day.
For purposes of good planning, though, buyers should always be conscious of how closing costs can impact their bottom line on a purchase.
If making the expected downpayment based on the purchase price is a stretch, making the downpayment plus the closing costs may be an impossibility.