What Are Closing Costs?
When you’re nearing the end of securing a mortgage, you’ll encounter closing costs.
Closing costs are the fees and expenses paid at the end of the mortgage process to finalize the loan. These costs include a variety of charges such as origination fees, appraisal fees, title insurance, and attorney fees.
Whether you’re buying a home or refinancing, these costs are an inevitable part of the process. They cover a range of services, from legal fees to property appraisals.
Rule of Thumb:
Closing costs range between 2% and 6% of the loan amount. This means for a $300,000 home loan, you could be looking at costs from $6,000 to $18,000. These costs vary depending on your location, lender, and the specifics of your loan.Who Pays for Closing Costs?
In real estate transactions, both buyers and sellers have distinct closing costs. The allocation of these costs can vary significantly based on the purchase agreement, local customs, and negotiations between the parties involved.
Buyer’s Closing Costs: Buyers typically bear the brunt of closing costs. These can include a range of fees such as loan origination fees, appraisal fees, title insurance, and escrow fees. The exact costs depend on factors like the type of mortgage, the lender, and the property’s location. Typically, these costs are a percentage of the loan amount.
Seller’s Closing Costs: Sellers are not exempt from closing costs. Their expenses might include a portion of the real estate agent’s commission, transfer taxes, and certain fees related to the title. In specific scenarios, to facilitate a sale, sellers may agree to pay a part of the buyer’s closing costs.
Negotiations in Closing Costs: The division of closing costs is often a negotiation point. Buyers may negotiate for sellers to cover some or all of their closing costs. This is more common in a buyer’s market or if the seller is particularly motivated to sell. However, the extent to which sellers can contribute is limited, especially by the type of loan the buyer is obtaining.
Types of Loan Closing Costs
Lender Fees
These fees are charged by your lender for processing and finalizing your loan. They can include an origination fee, which is a charge for setting up the loan. This fee typically ranges from 0-1% of the loan amount.
Other fees might include underwriting and processing fees, which cover the cost of assessing your loan application and preparing your mortgage. For more details on how these costs can affect your mortgage, see Understanding Interest.
Third-Party Fees
These are fees for services provided by parties other than your lender. They include the cost for a property appraisal, which is essential for determining the value of the home you’re buying.
You’ll also encounter title search fees, which are crucial for ensuring the property you’re buying doesn’t have any legal issues attached to it.
Prepaid Items
Some costs need to be paid upfront, like homeowners insurance or property taxes. These are often placed in an escrow account to ensure they’re managed correctly.
If you’re using a specific type of loan, like an FHA Loan, there might be specific guidelines on how these prepaid items are handled.
Breakdown of Each Closing Cost Fee
| Closing Cost Type | Purpose/Description | Typical Cost Range |
|---|---|---|
| Origination Fee | Charged by the lender for processing the new loan application. | 0-1% of the loan amount |
| Underwriting Fee | Covers the cost of evaluating and verifying the loan application. | $400 – $900 |
| Appraisal Fee | Pays for the home appraisal, a necessary step to assess the value of the property for the loan. | $300 – $700 |
| Title Search and Insurance | For researching the property’s records and insurance to protect against claims. | $400 – $900 |
| Survey Fee | Covers the cost of verifying property lines. | $300 – $700 |
| Credit Report Fee | Charged for pulling your credit reports from the credit bureaus. | $25 – $50 |
| Attorney Fee | Paid to the attorney who prepares and reviews all closing documents. | $500 – $1,000 |
| Escrow Deposit | Used to set up an escrow account for property taxes and mortgage insurance. | 2 months of property tax and mortgage insurance |
| Pest Inspection Fee | For inspecting the property for termites and other pest infestations. | $50 – $150 |
| Recording Fees | Paid to the local recording office for recording the property transaction. | $25 – $250 |
| Transfer Taxes | Taxes imposed by the state or local government to transfer the title from the seller to the buyer. | Varies by location |
| Homeowners Association Fees | If applicable, for processing and paperwork related to a homeowners’ association. | Varies by association |
| Prepaid Interest | Interest paid on the mortgage between closing and the end of the month. | Depends on loan amount and interest rate |
| Homeowners Insurance Premium | Initial premium for homeowners insurance. | Varies, typically a year’s premium |
Please note that these are general estimates and can vary based on the lender, the location of the property, and the specifics of the transaction.
Some fees may be negotiable or might be waived under certain circumstances. It’s always recommended for buyers to discuss these details with their lender and real estate agent to get a more accurate and personalized understanding of the closing costs they will incur.
Tips to Minimize Closing Costs
1. Negotiate with the Seller
Many buyers overlook the possibility of negotiating closing costs with the seller. While there are limits to what a seller can contribute, this negotiation can significantly reduce your out-of-pocket expenses.
2. Shop for Services
Some services included in your closing costs, such as title searches or pest inspections, can be shopped around. Finding more affordable options for these services can lower your overall costs.
For a deeper dive into the financial side of buying a home, including the importance of a down payment, check out our comprehensive guide.
How to save $435.00 on your loan
The price difference for a $500.00 loan in 90 days is $435.00.
Can Closing Costs be Negotiated?
A common question among homebuyers is whether closing costs can be negotiated. The answer is yes, but with certain limitations and considerations.
Negotiating with the Seller: One of the more common practices in real estate transactions is negotiating for the seller to pay a portion of the buyer’s closing costs. This is known as a seller concession.
The feasibility and success of this negotiation depend largely on the market conditions. In a buyer’s market, where sellers are keen to sell, they might be more willing to cover some of these costs to close the deal. However, in a seller’s market, where demand is high, this may be less likely.
Limits on Seller Contributions: There are limits to how much sellers can contribute to the buyer’s closing costs. These limits vary depending on the type of loan.
For example, with an FHA loan, the seller’s contribution is limited to a maximum of 6% of the sale price. Conventional loans also have similar limits, often capped at 3% to 9%, depending on the down payment. It’s important for both buyers and sellers to be aware of these limits when entering negotiations.
Lender Negotiations: Buyers can also negotiate some of the fees directly with their lender. This could include the origination fee or other lender-specific charges. Some lenders might be willing to reduce or waive certain fees, especially to compete with other lenders’ offers or retain the business of a qualified borrower.
Shopping for Services: Buyers have the option to shop around for certain services included in the closing costs. Services such as home inspections, title searches, and pest inspections can vary in price, and buyers may find more affordable options by comparing providers.
Closing at the End of the Month: Another strategy to reduce upfront costs is scheduling the closing towards the end of the month. This can lower the amount of prepaid interest a buyer needs to pay at closing.
While closing costs are an inevitable part of the home buying process, there are various strategies and negotiations that can be employed to reduce these expenses. Buyers should discuss these options with their real estate agent and lender to understand what’s feasible in their specific situation.
Calculating Mortgage Closing Costs
One key step in managing your home buying journey is accurately calculating your closing costs. This ensures you’re financially prepared for this significant expense.
The national average for closing costs is just under $7,000, but this can fluctuate greatly based on location and the specifics of your mortgage.
The Loan Estimate (LE) Form
Upon applying for a mortgage, you’ll receive a Loan Estimate form. This document outlines your proposed loan terms, including the estimated closing costs.
It’s a standardized form that allows you to compare offers from different lenders easily. Be sure to use this tool to its fullest by exploring different lenders and the various terms they offer.
The Closing Disclosure (CD) Form
As you progress with your mortgage application, your lender will provide a Closing Disclosure form. This document contains a detailed breakdown of your mortgage and closing costs. It’s essential to review this form thoroughly to ensure there are no surprises at closing.
Understanding Mortgage Lender Fees
Origination and Broker Fees These fees are charged for the creation and processing of your loan. They can range from 0-1% of the loan amount. Understanding these fees is crucial, as they directly impact the overall cost of your loan.
Processing and Underwriting Fees These fees cover the administrative costs of handling your loan application and the underwriter’s work in verifying your financial information. They are essential for ensuring your loan is processed accurately and efficiently.
Exploring Third-Party Fees
Appraisal and Title Services The appraisal fee covers the cost of assessing the property’s value, while title services ensure the property you’re purchasing has a clear title. These fees are vital for the integrity of the real estate transaction.
Survey and Attorney Fees In some states, attorney involvement is required in real estate transactions, which incurs additional fees. Similarly, a survey fee might be necessary to establish property boundaries.
The Role of Prepaid Items in Closing Costs
Escrow Accounts and Insurance Premiums Your lender may require setting up an escrow account to handle payments like property taxes and homeowners insurance.
What’s the Difference Between Closing Costs and a Down Payment?
Down Payment: The down payment is a percentage of the home’s purchase price that the buyer pays upfront. It’s a part of the total purchase price and not a fee. The down payment directly reduces the amount borrowed in a mortgage. For example, if you buy a $300,000 home and make a 20% down payment, you pay $60,000 upfront and borrow $240,000.
Closing Costs: Closing costs, on the other hand, are additional fees and expenses incurred in finalizing the mortgage and transferring ownership of the property. These costs are separate from the home’s purchase price and include fees for loan processing, title insurance, appraisals, and more. Unlike the down payment, closing costs do not count towards the equity of the home.
How do Closing Costs Differ by State or Region?
Closing costs in the United States can vary significantly by state and region. It’s important to note the following information is primarily dictated by the average price of a home in the following states. According to the ClosingCorp’s 2020 report:
States with the Highest Closing Costs (Including Taxes):
| State | Closing Costs (USD) |
|---|---|
| District of Columbia | 29,329 |
| Delaware | 17,727 |
| New York | 13,261 |
| Maryland | 11,709 |
| Washington | 11,513 |
States with the Lowest Closing Costs (Including Taxes):
| State | Closing Costs (USD) |
|---|---|
| Missouri | 1,571 |
| Indiana | 2,100 |
| Kentucky | 2,229 |
| Iowa | 2,272 |
| South Dakota | 2,276 |
These variations are due to several factors, including differences in state and local tax laws, the cost of services like appraisals and title searches, and the overall real estate market conditions in each area.
For buyers and sellers, this means that the location of the property significantly influences the total closing costs they can expect to pay. Understanding these regional differences is crucial for budgeting appropriately for a real estate transaction.
To explore more detailed state-specific closing cost data, refer to the ClosingCorp 2020 report available here.
