When it comes to saving money to buy or refinance a home, you have probably been mostly focused on the amount you need for a down payment. But you will also need to plan for closing costs, which are due when your loan closes for your home.
Understanding what closing costs are, how much they will run on average and what is included, can help reduce any unexpected financial obstacles when you close on your new home.
What Are Closing Costs?
Closing costs are fees levied when you take out a mortgage. Closing costs are paid at closing and typically range from 3% – 6% of the total loan amount.
Closing costs are fees paid to cover the costs required to finalize your mortgage when you are buying or refinancing a home. They are paid at closing, the point in time when the title of the property is transferred to the buyer, you.
Most of the closing costs are paid by the buyer, but the seller typically will have a few to pay too, such as the real estate agent’s commission.
Lenders are required, by law, to provide a Loan Estimate within 3 business days of receiving the application. The estimate provides a detailed list of what you can expect during the closing for costs.
How Much Are Closing Costs?
Typically, closing costs average 3% – 6% of the purchase price. So, if you are taking out a $400,000 mortgage on a house, you might pay $12,000 – $24,000 in closing costs.
Most buyers pay closing costs as a one-time, out-of-pocket expense when closing their loan.
If you need help with closing costs, check with state or local housing agencies to find out what may be available. Many offer low-interest loan programs or grants for first-time buyers. Another option is to take lender credits where you take a slightly higher interest rate in order to pay off the costs over the life of the loan rather than upfront.
You will pay higher closing costs if you choose to buy discount points, but the trade-off is a lower interest rate on your loan.
How To Calculate Closing Costs
When it comes to calculating closing costs, the most important thing to be aware of is everything that could go into those costs. With that in mind, we’ll walk you through an example based on a $400,000 loan amount. We’ll get into more detail on what each of these are later on, but for now there will be a short explanation and a focus on the math.
Before we get there, it should be noted that your loan estimate will list the things you can and cannot shop for. You can typically look around for different providers of title insurance, survey services, homeowners insurance, etc.
Under the first box on the closing cost page are the fees the lender charges to give you the loan, including an origination fee, which is typically around 1% of the loan amount. On our $200,000 loan, this is about $2,000. Some lenders list an origination fee as two separate fees for processing and underwriting. Add them together.
The typical appraisal fee can be anywhere between $200 – $600 with a typical appraisal fee being around $400 or $500. It’s important to note that this particular cost can vary quite widely because it depends on how many appraisers are available who are qualified to value your home for the loan you’re getting and how far they have to travel.
It’s important to note that an appraisal may be covered in whole or in part as part of your application fee and commitment to work with a lender. If the application fee doesn’t end up covering the whole appraisal, you may pay this partially at closing.
You’ll have a credit monitoring fee that could be around $10. This is something set up so that your lender gets alerts if you have major changes to your credit when you’re going through the mortgage process.
A lender has to get your credit report from all three credit bureaus. The cost of this could be as high as $60 for a merged report. This could also be covered as part of your application fee when you lender pulls your credit.
Your lender may have to make a determination as to whether you need certain types of hazard insurance like flood insurance. The fees for determination and continued monitoring aren’t too high – maybe around $20.
The last cost under the second section of your closing costs is tax service. Because not paying your taxes can cause local authorities to take your property back, there’s a service for monitoring whether your property taxes get paid. This might be $60.
The next section is services that you can shop for. This starts with title search and abstract services. This is to make sure there aren’t any liens or judgments against the property that will cause trouble in the future. An abstract is a description of the property. This might cost around $100.
There may be mail and courier fees associated with the title that are around $50.
If you’re getting a mortgage, you’ll be required to get a lender’s title policy. This protects the lender in the event someone comes along with a legitimate claim to your property in the future. For the sake of our example, let’s say this is $1,500. However, this is another one of those costs that varies heavily geographically.
Notary fees might be around $50. The documents signed at your mortgage closing have to be notarized. Notaries may charge a flat fee for a certain number of documents and then a smaller fee for every document after that.
A settlement or closing fee might be $400. This is the fee to conduct the actual closing itself and finalize the transaction.
If a survey has to be done to determine your property lines and the exact dimensions of your land, you’ll pay at closing. This might be $800, but it heavily depends on the complexity of the survey job.
Finally, the average court record search associated with your title might cost $100. This is about checking for any legal entanglements involving the property.
The next section deals with the fees of your local authorities for record-keeping and property transfer. A mortgage recording fee is typically a flat fee while the transfer tax is a small percentage calculated based on your property value. For the purposes of this example, we’re going to say it’s $400, but it varies quite a bit based on location.
The next section is about prepayments for homeowners insurance and property taxes as well as escrow set up, so a lender might require you to prepay a year of homeowners insurance up front so as to know you covered along with prepaying a certain number of months of property taxes. This may total $3,200.
You’ll also have to prepay interest due between the time of the due date of your first payment and your closing date. Let’s say that ends up being $300 based on your interest rate.
The last section on closing costs has to do with whether you have an owner’s title policy. While a lender’s title policy protects the lender, an owner’s title policy gives you the money to purchase a new property if you need to move out. One estimate places the cost around $800, but this can vary quite a bit depending on location and provider.
If we take the high end of all estimated ranges for our $200,000 loan amount, the total cost is $10,450 which is roughly 5.23% of the loan amount.
While this is one example of something that might be typical, there are other types of closing costs that may push things higher or lower. On FHA and VA loans, people often pay upfront mortgage insurance programs or funding fees at closing if they aren’t built into the loan. Additionally, some people pay for mortgage points to lower their rate.
Meanwhile, things that might lower closing costs are seller concessions, costs paid by the seller as part of negotiations. Closing costs also tend to be lower on refinances because they don’t always require an appraisal to get a home valuation and the title work may be simpler.
The final way to keep closing costs down is to take a lender credit. This is where you negotiate with the lender, possibly taking a slightly higher interest rate in exchange for lower closing costs. You’re spreading the cost of over the life of the loan so you don’t have to pay it up front.
What Do Closing Costs Include?
The closing costs you’ll pay will vary depending on where you’re buying your home, the home itself and the type of loan you pursue.
Closing costs may include appraisal fees, loan origination fees, discount points, title searches, credit report charges and more. Here’s a breakdown of common closing costs.
Appraisal: An appraisal will be mandated by the lender to make sure the home is worth the sale price. Most appraisers charge $300 – $500 for their services.
Escrow fees: You may have to pay portions of property taxes and insurance upfront into an escrow account.
Flood certification: If your house is situated on or near a flood plain, your lender may require documentation confirming its status, which involves paying around $15 – $20 for a certification from the Federal Emergency Management Agency (FEMA).
Home inspection: Depending on the square footage and type of inspection, the buyer pays $500 – $1,000 for a home inspection to look for signs of damage and defects. This is nonrefundable money, and there’s no guarantee the seller will make repairs or renegotiate the sales price based on results of the inspection.
Property taxes: At closing, the buyer typically pays the city and county property taxes due from the date of closing through the end of the tax year.
Annual assessments: If you’re buying in a development with a homeowners association (HOA) that requires an annual fee, it may be due upfront at closing.
Title/attorney fees: This includes necessary government filing fees, escrow fees, notary fees and other expenses related to transferring the deed. The cost of title and attorney fees varies significantly from state to state.
Loan interest: You’ll need to pay interest on the loan prorated from the closing date to the first of the following month.
Lender fees: These cover items ranging from administrative costs to pulling your credit report to wire transfer fees. If a lender boasts unusually low rates, it’s possible they’ll try to make up the difference with additional lender fees, so be sure to compare apples to apples.
Application fee: This is charged by the lender and varies in price, up to $500. The application fee is nonrefundable, even if you aren’t approved for the loan.
Assumption fee: If you’re assuming a conventional loan from the seller, you’ll pay an assumption fee set by the lender, typically $800 – $1,000, or in some cases 1% of the loan amount. For FHA loans, the maximum allowed is $500, and for VA loans, the max is $300.
Prepaid interest: This is daily interest that accrues on the loan between the closing date and first monthly mortgage payment.
Loan origination fee: These are the fees paid to the lender to obtain a mortgage and are expressed as a percentage of the loan amount. If the loan amount is $100,000 and you see a $1,000 loan origination fee on the paperwork, the lender is charging one mortgage point.
Discount points: Discount points are fees paid directly to the lender by the buyer at closing in exchange for a reduced interest rate. This is also called “buying down the rate.” One point costs 1% of your mortgage amount (or $1,000 for every $100,000).
Title search fee: Paid to the title search company that researched the property’s history to make sure the title (ownership) will be “clear.” Typically, this runs $75 – $100.
Other Insurance-Related Costs
Mortgage insurance application fee: If your down payment is less than 20%, the lender will require private mortgage insurance (PMI). This fee varies by lender.
Upfront mortgage insurance: PMI can be rolled into your monthly payments, but it can also be paid at closing. Paying upfront usually saves money.
FHA, VA and USDA fees: Fees on FHA, VA, and USDA loans differ from those charged on conventional loans. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% and a monthly fee. VA home loans require an upfront, one-time VA funding fee, determined by the loan amount, the buyer’s service history and other factors. VA home loan applicants can pay all or part of the fee in cash or roll it into the loan amount to reduce out-of-pocket expenses.
Lender and owner title insurance: Lender policies protect the mortgage lender’s interest. Buyer policies protect the buyer’s interest. The average title insurance policy carries a one-time premium of about $1,000, paid by the buyer.
Closing Costs For Buyers: What’s Negotiable?
The buyer typically pays the majority of closing costs. Of course, there’s always room to negotiate – but choose your battles wisely. A seller will likely be much more open to negotiation when presented with an offer of the full asking price or when it’s a buyer’s market.
Another option for these costs is to meet the seller halfway, dividing expenses between both parties. Sellers traditionally pay for certain things, like the real estate agent commission. Other things, like the owner’s title policy, may be paid for by the seller depending on local custom. Alternatively, you could negotiate seller concessions.
Seller concessions are part of your closing costs that, instead of paying yourself, you negotiate to have the seller pay. Buyers might ask for concessions if they think they’ll have trouble covering their closing costs or if a home inspector finds issues that are going to cost money to fix.
It’s worth noting that concessions can help out the seller as well. If they are selling their home in a crowded market and aren’t having much luck, offering concessions can make the deal seem more attractive to potential buyers.
So, what are buyers on the hook for? While certain costs (such as appraisal fees) tend to be set and nonnegotiable, other items such as title insurance, pest inspection and the settlement agent may be open to negotiation. Of these fees, you’ll save the most on title insurance and settlement (which are sometimes combined). But if you’re planning to comparison shop for title and settlement, do so quickly because these services take time.
Also, watch for miscellaneous fees like funding and delivery fees. If the fees seem vague, you may be able to push back to have them lowered or eliminated.
Closing Costs: Key Takeaways
We’ve gone over an awful lot regarding closing costs up to this point, so let’s close by giving a quick summary of the key points to remember:
- Closing costs are fees related to your home purchase or refinance that are paid when you sign your paperwork.
- These are anywhere between 3% – 6% of the loan amount. On a $200,000 loan, that amounts to $6,000 – $12,000.
- Closing costs break down into several broad categories including lending costs like loan origination fees, property-related feels like appraisal and title and fees related to insurance and escrow set up.
- Things that sellers might be able to pay for through seller concessions include owner’s title insurance, attorneys’ fees, etc.
- You can negotiate with your lender by taking what are known as lender credits. You can take a slightly higher interest rate to pay certain closing costs over the life of the loan rather than having to come up with all the closing costs at the time of settlement.
- Closing costs are highly variable depending on the type of loan you’re getting, whether you take any lender credits or seller concessions and where you live.
- Closing costs tend to be a little bit lower on a refinance because sometimes a full appraisal isn’t required and the title work can be easier.
Now that you know more about what to expect in terms of closing costs, if you’re ready to get started, give us a call!