What Are Closing Costs and How Much You’ll Pay?
The purchase of a home or a refinance is a fairly complex transaction involving many different agencies and individuals. The process requires a number of moving parts, and buyers and sellers should expect a multitude of additional costs and expenses during the closing process. The final agreed upon price of the home is not the total amount you will end up paying. In the real estate world, there are additional expenses that come with the final price, which are also known as closing costs.
What are closing costs?
The list of additional costs, fees and required expenses that are necessary to close on the purchase of a home or a mortgage refinancing are known as closing costs. Closing costs generally add up to about 2% to 5% of the home’s purchase price. The fees typically fall on the buyer to pay, but in some situations you may be able to negotiate the seller covering part of the costs.
“While you can sometimes negotiate with the seller to cover some or all of a buyer’s closing costs, buyers should still budget as if they will pay for closing costs (about 2% to 5% of the home’s value) when shopping for a home,” Justin Havre, owner of Justin Havre and Associates of RE/MAX First, said.
“I think that sometimes the articles that buyers might come across while doing their research online can make certain seller concessions seem more commonplace than they are. While it’s always a possibility, they need to act as if they won’t receive assistance from the seller to avoid missing out on a home they could have afforded otherwise,” Havre said.
What fees are included in closing costs?
The list of fees included in closing costs can get extensive and is heavily dependent on your mortgage lender, the state you live in and your loan type. These fees are often related to the organization and underwriting of your mortgage loan, filing the necessary records related to your mortgage loan and researching the title on the property. While you may be unsure of what all will be included, your lender is required to supply you with a good faith estimate of all associated closing costs. You’ll receive an estimate of these closing costs in the loan estimate document, which you’ll typically receive within three days after applying with a prospective lender. You’ll receive your final closing disclosure three days before you close, which will outline all fees and any necessary minor adjustments.
Some of the most popular mortgage closing costs you’ll see include:
- Application fee — This fee is the amount you pay for your mortgage loan application to be processed.
- Appraisal fee — The mortgage lender requires an appraisal of the home to determine its fair market value.
- Attorney fee — This fee covers the services of the real estate attorney who oversees the closing of your mortgage loan.
- Credit report — The mortgage lender will pull your credit report as part of the loan underwriting process to determine your creditworthiness for a mortgage.
- Discount points — Some consumers purchase “points” to reduce the interest rate on their mortgage loan.
- Home inspection — Most lenders require a home inspection of the property to ensure it is in good shape and doesn’t require major repairs.
- Homeowners insurance premiums — Many lenders require proof of homeowners insurance on the property, and some consumers may pay their initial homeowners insurance premium as part of their closing costs.
- Lender’s title insurance — This insurance protects the lender in the event a problem arises related to the property title, such as someone else filing a legal claim against the property.
- Origination fee — Paid to the lender, this fee covers processing the mortgage loan.
- Mortgage broker fee — The mortgage broker takes a fee to pay for its services in processing your loan.
- Mortgage insurance application fee — This fee pays for processing your application for private mortgage insurance.
- Notary fees — Your loan documents usually have to be witnessed and signed by a notary public for them to be considered official.
- Owner’s title insurance — This insurance protects you, not the lender, in the event a problem arises related to the property title.
- Prepaid interest — This interest amount refers to the amount of interest that accrues on the mortgage loan from the time you settle the loan and the day your first monthly payment is due.
- Private mortgage insurance (PMI) — This insurance protects the lender, not you, in the event you default on your mortgage loan.
- Property taxes — It’s common for the buyer to pay some city and county taxes upfront when you close on the mortgage loan. How much depends on where you live.
- Title search fee — Your lender will run a search on the property title to ensure it belongs to the seller and no one else has a claim or lien on the property.
How much are closing costs?
If the long list of closing costs has you worried, you should know that you won’t always see all of these fees on your closing documents. You should also be aware that at times, many of these fees are bundled together under one line item. These are the same fees all other home buyers or refinancers pay. On average, the total of all these costs comes to around 2% to 5% of the price of the home.
For example, let’s say you are purchasing a $400,000 home. Your closing costs will most likely be between $8,000 and $20,000. Where you fall within this range will depend on your lender, the state where the home is located and the type of loan you are using.
4 Ways to save on closing costs
Closing costs can carry a bit of sticker shock on top of what is already most likely the largest purchase of your life, but there are ways you can mitigate these costs and work to make them more manageable.
1. Do your research
The first and most important way you can lower closing costs is by aggressively shopping potential lenders. Each lender will have a different list of the closing costs they charge, and the rates for each line item may be quite different. Remember, even a few small percentage points can make a difference in the cost of your refinance or home purchase.
Once you settle on a lender, don’t be scared to look through the loan estimate document and closing disclosure document with a magnifying glass. If you find fees that don’t make sense or seem like double charges, ask your lender to explain. Often, a lender is not willing to lose a deal over a fee that you’re concerned about. The worst they can say is no.
2. Outsource service partners
You can also save on closing costs by outsourcing some services to vendors of your choosing. Lending companies will push to use their preferred service partners for many of the different closing costs. However, if you’re able to find a competitor that will charge less, you can negotiate to use them to save some money.
3. Have the seller pay some of the costs
While not as common as many people think, you can try to get the seller to cover some or all of the closing costs. This can be accomplished by the seller paying them outright or by lowering the cost of the home by the amount of the closing costs. If you’re purchasing from a seller who is desperate to get out of their home and make a sale, you may have significant leverage to shift some or all of these costs. Again, the worst they can say is no.
4. Take advantage of assistance programs and grants
You may also be able to get help with your closing costs by taking advantage of assistance programs or grants. These programs are sometimes offered through your lender or by third parties to help cover the costs associated with closing. While each program is different, the intent is the same — to help you cover the expected or unexpected costs associated with securing your mortgage.
Mortgage documentation for closing
There are tons of closing documents that you’ll receive either the day of, or in the weeks prior to, your closing. These include:
- Loan estimate: Your lender is required to send you a loan estimate three days after you apply for a mortgage. This documents all the details of the mortgage loan: the loan amount, the interest rate, a full list of fees and any other costs associated with the loan.
- Closing disclosure: Similar to your loan estimate, the closing disclosure contains the final numbers for your loan, so you may see some differences between it and your loan estimate.
- Promissory note: This is the legal document you sign confirming you will repay your mortgage.
- Mortgage/security instrument: Also called the Deed of Trust, this document provides your permission to the lender to take the property through foreclosure in the event you fail to pay your mortgage loan as agreed.
- Initial escrow disclosure: As part of your mortgage agreement, you will pay a specific amount for homeowners insurance and property taxes, which goes into an escrow account until it’s time to pay those expenses. This document breaks down how much of your monthly payment goes into escrow.