A Guide To Closing Costs
Amongst all the other costs of buying a new property, closing costs may seem inconsequential. However, to underestimate closing costs would be a mistake.
These fees are a significant percentage of your loan amount, and they cover everything from insurance to inspections and lender fees.
This article will guide you through the maze of expenses associated with closing on a property so that you can be the most prepared when it’s time to sign on the dotted line for your new home or investment property.
What Are Closing Costs?
To start at the beginning: What are closing costs? Mortgage closing costs are various fees associated with closing on a home and finalizing a mortgage. Closing costs are additional fees on top of the typical expenses associated with your loan (like your down payment, principal loan balance, and interest).
Closing costs serve the purposes of establishing your loan and completing the real estate transaction. They are required when buying a home for the first time as well as when you refinance a mortgage. The amount of the fees themselves are sometimes negotiable – depending on the type of loan you have, your location, and your specific lender and seller. Additionally, first-time home buyers may get assistance and/or closing costs help through low-interest loan programs or other programs.
Seller Concessions
Most closing costs are the buyer’s responsibility. However, buyers can sometimes ask the seller to pay a portion of the closing costs. A seller concession, if agreed to by both parties, can be arranged such that the seller pays for part of the fees.
Why might the seller agree to do this? Easing the buyer’s burden to pay some of the fee amounts could help the seller sell the home faster or at a higher price than they could otherwise. However, there are limits on seller concessions set by lenders – Sellers can only contribute a certain percentage of the mortgage value or purchase price to a buyer’s closing costs.
Below are the maximums sellers can pay based on the loan type and down payment.
Conventional loans
Primary residencies:
- 9% for down payments that are 25% of the loan or more
- 6% for down payments between 10% and 25%
- 3% for down payments less than 10%
Secondary residencies
- 9% for down payments 25% of the loan or more
- 6% for down payments between 10% and 25%
Investment properties
- 2%, regardless of the down payment amount
FHA loans
USDA loans
VA loans
Note that for conventional loans, the maximum seller concession is significantly lower for investment properties than for first or second homes.
How Much Are Closing Costs?
Closing costs are often underestimated, especially by first-time home buyers. On average, closing costs total around 2-6% of the loan amount, according to NerdWallet.
The following chart shows an estimate for closing costs on a variety of loan amounts:
| Mortgage amount | Approximate closing costs |
| $150,000 | $3,000-$9,000 |
| $200,000 | $4,000 – $12,000 |
| $250,000 | $5,000 – $15,000 |
| $300,000 | $6,000 – $18,000 |
| $350,000 | $7,000 – $21,000 |
| $400,000 | $8,000 – $24,000 |
| $500,000 | $10,000 – $30,000 |
| $600,000 | $12,000 – $36,000 |
Keep in mind that details like your state, location, and the type of loan can influence your closing costs. Rocket Mortgage has a more detailed chart with the average closing costs by state, including and excluding transfer taxes.
For a more specific estimate, use a loan estimate or closing costs calculator like this one from Nerd Wallet.
Do I have to pay closing costs up front?
Most lenders require that closing costs be paid up front, out-of-pocket, as a one-time expense.
Some lenders allow buyers to include their closing costs in their monthly mortgage payment. This is known as “rolling” your closing costs into the loan. However, be wary of this strategy: If you choose to roll closing costs into your mortgage, you’ll also pay interest on them just as you will for the principal balance. This could lead to paying substantially more interest over time.
The most common ways how to pay closing costs are to use traditional methods like pulling from your checking or savings account, using checks, or utilizing wire transfers.
What Do Closing Costs Include?
Closing costs include various charges imposed by your lender for processing your loan application and other services provided during the closing process. Your lender will list out all the closing costs in a document called a closing disclosure, which you’ll receive at least a few days before you close on the property.
We’ve included descriptions of the most common closing costs below:
Application Fees
An application fee includes the cost to process your loan request through your lender. Some lenders charge application fees as a separate one-time expense, while others treat them like deposits that will later be applied to your other closing costs. The amount of application fees varies, but they can be up to $500.
Loan-Origination Charges
Loan-origination charges cover the cost for your lender to create, process, and underwrite your loan. ‘Underwriting’ refers to the process of verifying that you qualify for the loan, including verification of your credit, assets, debts, income, etc. Underwriters dedicate time to approving your employment and income verification documents, running a credit check, calculating your debt-to-income (DTI) ratio, and performing other checks and measures to ensure you qualify for the loan.
Loan-origination charges typically add up to around .5 to 1% of your loan amount.
Attorney Fees
Some states require buyers to hire a real estate attorney to walk them through the home-purchase process. If a real estate attorney is required, the fees for their services will be included in the closing costs. Attorney fees include the time and expertise an attorney spends to draw up the proper paperwork and facilitate the title transfer.
Attorney costs vary by location/state.
Title Insurance Fees
Title insurance safeguards you against any potential legal issues or disputes that may arise concerning the property’s title. There are two primary types of title insurance: lender’s title insurance, which is typically a requirement by the lender to protect their investment, and owner’s title insurance, which is optional and protects your ownership rights.
The cost of title insurance can vary depending on the property’s value and location, but it’s a one-time fee paid at closing. Title-related costs tend to run about 0.5% to 1% of the loan amount, and they also include the title search fee and other miscellaneous costs.
Appraisal Fees
An appraisal is an evaluation of the property’s value conducted by a licensed professional to ensure that the agreed-upon price aligns with the market value. This process is essential for both the buyer and the lender to determine if the property is worth the amount being paid.
The cost of an appraisal typically ranges from $300 to $600, depending on the location and size of the property. Your appraisal is one of the most important closing costs since it helps you avoid overpaying for the property as well as assisting you in securing financing from your lender.
Credit Reporting Fees
Credit reporting fees include the cost of having your credit history checked during the underwriting process. This typically costs between $10 and $100, depending on your state and credit information provider.
Discount Points
Buyers can purchase mortgage discount points to reduce their interest rate over the course of the loan. These are called “buydowns,” and they are used to save money on interest. A discount point equals 1% of the loan amount.
Each discount point reduces your interest rate by .25%. So, for instance, if you had a $200,000 loan with a 6% interest rate and you wanted to reduce that rate to 5%, you would need to purchase four discount points, each worth .25 of a percent and each priced at $2,000 (for a total of $8,000). In essence, by paying $8,000 up front, you could reduce your interest rate by 1%.
Discount points are among the few closing costs that are optional.
Escrow Account Fees
Escrow account fees are also called prepaids or reserve fees. When your lender sets up your loan, they will also establish an escrow account, which is used to hold reserved funds for property taxes and insurance. At closing, you will contribute a certain amount of reserved funds to the account, to be kept in escrow and later used by the lender to make tax and insurance payments on your behalf.
The total you’ll pay in escrow account fees varies widely, but it often adds up to around two months’ worth of expenses.
Government Recording Fees
Government recording fees are expenses charged by a government agency to register the sale/purchase of real estate and update local or municipal property ownership records. Your ownership of the new property then becomes public record. Each county sets their own fees, so the total cost you’ll pay in government recording fees varies depending on where the property is located.
Private Mortgage Insurance (PMI)
If your downpayment is less than 20% of the loan amount, your lender will likely require you to purchase a private mortgage insurance policy, or PMI. The purpose of PMI is to protect the lender if you were to default on the loan.
Although PMI is a reoccurring cost, lenders will often require you to pay an upfront mortgage insurance premium for the first month, as a closing cost. In some cases, buyers are also allowed to pay more of their PMI payments up front so that they don’t have to pay as much of the premium during the loan term.
Private mortgage insurance premiums range from .5% to 5% of the original mortgage loan per year.
Miscellaneous Closing Costs
Miscellaneous closing costs encompass a variety of fees that aren’t directly related to the property’s appraisal or the mortgage. These costs may include document preparation fees, courier fees for transporting documents, wire transfer fees for transferring funds, and notary fees for verifying important documents. Additionally, you might encounter loan tie-in fees, which are charges associated with connecting multiple loans for a single property.
In some regions, a termite inspection may also be required by your lender. Termite inspections are separate from traditional home inspections and can cost anywhere from $75-$200. Flood certifications are also often necessary for properties located in flood zones. They usually cost around $15-$25.
It’s important to review all the miscellaneous closing costs and loan fees carefully, as they can add up and significantly impact the overall cost of your real estate transaction. Be prepared and informed about these additional costs to avoid any last-minute surprises.
Preparing for Unexpected Fees and Getting Closing Costs Help
You may be expecting the standard closing costs when finalizing your real estate transaction, but other expenses may take you by surprise. Some of these extra costs might include property tax, homeowners insurance, pest inspections and/or treatments, and homeowner association fees. It’s important to budget for these expenses to avoid any financial surprises down the line.
Additionally, there are many expenses that aren’t “closing costs” in the strict sense but that you will nonetheless incur when purchasing a new property. Don’t forget about moving costs, repairs or renovations, and new furnishings. Being prepared for these additional expenses will help you navigate the real estate transaction smoothly and prevent any last-minute financial strain.
If you find that the closing costs, down payment, and first few months of mortgage payments are toppling your finances, you may be able to get closing costs help. For instance, you could request a seller concession, apply for first-time homeowner loans, or investigate financing some or all your closing costs (if allowed by your lender).
Conclusion
Now that you have a better understanding of the various fees and costs involved in closing a real estate transaction and know how to pay closing costs, you can be prepared for the financial aspects of the process. Remember to budget for common lender fees, essential title insurance costs, appraisal expenses, and miscellaneous closing and convenience costs before you make an offer on a home.
By taking the time to research and understand all the possible costs associated with buying a home, you can do your best to ensure a successful and stress-free closing process.
