When you’re preparing to buy a home, getting an affordable purchase price and low mortgage interest rate are the obvious high priorities. As you finalize the deal, however, there are other expenses that can sneak up on you: home closing costs.
Closing costs are the fees you pay to set up your loan and transfer ownership of the property. They cover a variety of loan fees, taxes, insurance premiums, third-party services, and more. Closing costs can quickly add up, so you won’t want to underestimate them when they’re due.
Here’s a full list of closing costs, and how much you can expect to pay:
- What Are Closing Costs?
- How Much Are Closing Costs on a House?
- Closing Costs: A Complete List
- Who Pays Closing Costs on a House?
- Calculating Your Closing Costs
- How To Budget For Closing Costs
- How To Reduce Closing Costs
- Closing Costs FAQ
- The Bottom Line on Closing Costs
What Are Closing Costs?
Closing costs are the fees you pay when you take out a mortgage and buy a home. What do closing costs include? They usually cover the loan origination fee, the appraisal fee, up to a year’s worth of property taxes, and the first year of homeowners insurance — costs that need to be settled before you take ownership.
You need to pay at closing both your down payment and closing costs. Your escrow or closing agent can advise you on the preferred payment method, which usually is a cashier’s check.
There are a handful of documents you should bring to closing, as well as documents you need to sign. The former ensures you end the day with the keys to your new home in hand, while the latter assures your lender that you’re responsible for repaying your mortgage.
Bring with you the following to ensure a smooth closing:
- Photo identification. You’ll need to verify your identity for your lender. Bring a valid driver’s license, a government ID card, or your passport. Everyone named on the mortgage must provide ID.
- Cashier’s check or wire transfer. Prior to closing, your attorney or escrow company will calculate how much cash you need to close. This amount covers closing costs, your down payment, prepaid interest, property taxes, and homeowners insurance.
- The closing disclosure. This form lists the final terms and costs of the mortgage. You should receive it at least three days before closing. You’ll want to compare the documents you sign at closing against the disclosure to ensure accuracy.
- The purchase agreement. This is another document you’ll want to have on hand to compare with the final documents at your closing.
- Proof of insurance. Your lender will want proof you have homeowners insurance before you take ownership.
- An attorney. It’s a good idea to bring with you an advocate who knows the legal ins and outs of the process to protect your interests and advise you on any decisions that need to be made.
The following are some of the documents you’ll sign at closing:
- Promissory note. The lender will require you sign a promissory note, which puts in writing that you agree to repay the mortgage.
- Mortgage, security instrument, or deed of trust. Whatever it’s called, this document gives the lender permission to take ownership of the property through foreclosure proceedings if you default on the loan.
- Initial escrow disclosure. This document explains how much money you’ll pay into escrow each month as outlined in your mortgage agreement.
How long it takes to close varies depending on a number of factors, like the type of mortgage you’re taking out, and any repairs or inspections that need to be made. It’s important that you be patient and prepared for delays.
It usually takes at least 30 days to close a loan, with the average time to close hovering around 50 days.
Read More: How To Prepare To Buy a House in 1 Year
How Much Are Closing Costs on a House?
Closing costs can differ from buyer to buyer based on the purchase price, requirements from the lender, loan type, location, and local laws.
Average closing costs
How much are closing costs for the buyer? Closing costs typically run about 2% to 5% of the purchase price. So, if the house is worth $300,000, then you’ll likely pay $3,000 to $15,000 in closing costs.
Average Closing Costs by State
|State||Average closing costs with taxes||Average home price||Closing costs as a percentage of sale price with taxes|
Can you waive closing costs?
If you’re concerned about closing costs, you can try asking your lender to waive or reduce some of the fees.
One way to lower closing costs is with lender credits, which reduce your upfront costs in exchange for a higher interest rate on the loan. Saving money at closing this way likely will result in you paying more in interest over time.
With no-closing-cost or zero-closing-cost mortgages, it’s a similar deal — the closing costs are added to either the loan amount or the interest rate.
If you can’t get your lender to waive any fees, it may seem tempting to skip services like the home inspection to save money. However, it’s risky to omit that step. If the inspection reveals major flaws, you can ask the seller to make repairs or reduce the home price. If you bypass the inspection and discover the flaws after closing, you’ll have to foot the bill.
Closing Costs: A Complete List
Here’s a full rundown of the different closing costs you can expect to encounter. Keep in mind that closing costs vary from situation to situation, so the fees listed are estimates.
- Application fee: Lenders may charge a fee to process your mortgage application. This costs up to $500 and is nonrefundable.
- Assumption fee: Mortgage assumption happens when the buyer takes over the seller’s home loan after approval from the lender. Some lenders will charge an assumption fee, depending on the mortgage type. These fees vary and are capped for certain types of loans, but usually will not exceed more than 1% of the loan balance being assumed.
- Credit reporting fee: This covers the cost of pulling your credit, and usually is around $25.
- Discount points: Buying discount points lowers your interest rate in exchange for an upfront payment. The cost of buying points varies depending on how much your lender charges, though it’s typically 1% of the total loan.
- Escrow funds: Your lender may ask you to deposit two months’ worth of taxes and insurance payments into an escrow account, though the exact number of months can vary by lender.
- Origination fee: This covers the cost of setting up and underwriting the loan. Underwriting is the lender’s process of confirming that you can afford your mortgage. The origination fee usually costs about 1% of the loan amount.
- Prepaid interest: You need to pay the daily interest that accrues on your loan between the closing date and when you make your first mortgage payment. This total also depends on your interest rate and the loan amount.
- Rate lock fee: Interest rates change daily. A rate lock prevents your interest rate from changing for a certain amount of time. It gives you a stable rate between preapproval and closing, and generally costs between 0.25% to 0.50% of your loan amount. Lenders may offer a rate lock for free.
- Underwriting fee: Lenders may separate the origination fee into an underwriting fee and a processing fee.
- Flood certification fee: If you are buying a home on or near a flood plain, you might have to pay a fee of $15 to $25, which goes to the Federal Emergency Management Agency.
- Lead-based paint inspection fee: If the home was built before 1978, it needs an inspection to confirm the absence of lead. This usually costs around $300.
- Pest inspection fee: You may be required to get a pest inspection, which costs around $100.
- Appraisal fee: This covers the cost of the home appraisal, where a third-party certified professional assesses the property’s fair market value. An appraisal typically costs between $300 and $700.
- Survey fee: A land survey verifies the boundaries of your property and costs anywhere from $300 to $950.
- Courier fee: Your lender may charge a fee for transporting your paperwork. It costs around $30.
- Notary fee: Depending on where you live, your closing documents may need to be notarized, which can cost around $50.
- Recording fee: This costs around $125 and goes toward updating public land ownership records.
- USDA loan guarantee fee: With USDA loans, which are backed by the Department of Agriculture, you’ll almost certainly pay a nonrefundable, upfront guarantee fee that costs no more than 3.5% of the mortgage amount, and an annual fee of no more than 0.5% of the unpaid principal.
- VA funding fee: With VA loans, which are backed by Veterans Affairs, you must pay a fee to help fund the program. If a first-time homebuyer puts down at least 10%, then the fee is 1.4% of the loan amount. The fee costs 1.65% if you put at least 5% down, or 2.3% if you put less than 5% down.
- HOA fees: If you’re purchasing property in a community governed by a homeowners association, then you’ll need to pay prorated dues at the closing. These fees vary depending on your HOA community.
- HOA transfer fee: This covers the cost of transferring HOA obligations from the seller to the buyer. It’s often covered by the seller.
- FHA mortgage insurance: With FHA loans, which are backed by the Federal Housing Administration, you must pay an upfront mortgage insurance premium, which costs 1.75% of your loan amount. You also need to pay an annual mortgage insurance premium that varies based on your loan terms.
- Homeowners insurance: You typically pay the first year of homeowners insurance upfront.
- Private mortgage insurance: With conventional loans, you generally must purchase PMI if your down payment is less than 20%. This protects the lender if you stop repaying your mortgage. PMI costs roughly $30 to $70 for every $100,000 you borrow.
- Property tax: Your property tax bill depends on your home’s location and value. Up to a year’s worth of property taxes may be due at the closing.
- Tax monitoring and status research fees: These cover the cost of getting a third-party company to confirm that your property taxes are accurate and up to date.
- Transfer tax: Your local government charges a transfer tax to update the home’s title and transfer ownership to you. This tax varies by location and is either a flat fee or based on the purchase price.
- Attorney fees: Your state may require you to use an attorney in the real estate transaction. The exact cost can vary significantly.
- Closing or escrow fee: Your closing or escrow agent oversees the transaction and conducts the closing. The fee amount can vary depending on the purchase price.
- Real estate agent commission: The total real estate commission on a home sale is usually 5% to 6% of the purchase price. The buyer’s agent and the seller’s agent typically split this sum.
- Lender’s title insurance: This policy protects the lender if there are issues with the title, and can usually cost anywhere from $150 to upward of $1,000, depending on the home.
- Owner’s title insurance: Owner’s title insurance protects the buyer if someone sues with a claim against the home. This policy also costs $150 to upward of $1,000, depending on the property.
- Title search fee: A title search hunts for any claims on the home, including any unpaid back taxes. It costs $200 to $400.
While the buyer and the seller both pay closing costs, the buyer typically takes care of the lion’s share.
Keep in mind that there are limits on how much the seller can contribute to closing costs. These caps vary by loan type and are based on a percentage of your mortgage. Here are the maximums by loan type:
- Conventional loans: 3% if the down payment is less than 10%; 6% for 10% to 25% down; and 9% if the down payment is more than 25% of the sale price.
- FHA loans: 6%.
- USDA loans: 6%.
- VA loans: 4%.
As the buyer, you’re going to be responsible for most — if not all — of the costs associated with making sure the house in question is actually the one you want to buy. That includes the following:
- All appraisals and home inspections. If you want to make sure the house is up to code and to know what’s wrong with the property, these costs are a necessity.
- Credit reports. Not only will the hard pulls hit your credit score, they also will result in small charges for each report pulled.
- Homeowners insurance. This cost will be paid directly into your escrow account over the course of the year.
- Loan origination fees. Your lender expends time and effort to set up your specific mortgage, so that cost is charged to you as a percentage of the total loan.
- Recording fees. You need to pay the municipality for recording your home purchase and mortgage.
- Prepaid interest. From the moment you sign the loan until you make your first payment, you will owe some money for prepaid interest. The closer to the end of the month you close, the less you’ll have to pay.
- Mortgage insurance. If you put at least 20% down on a house, you don’t have to worry about private mortgage insurance.
Anything that goes into the home itself prior to the final sale is the seller’s responsibility. Those costs include:
- HOA fees. If the home in question is under the purview of a homeowners association, then the seller will have to cover any HOA fees due before closing.
- Title transfer fees. To transfer the title to the buyer, the seller has to pay the county to handle that transaction.
- Agent or Realtor commissions. Real estate agents or Realtors on both sides of the transaction make money on the sale, which comes out of the seller’s pocket. How much is charged is based on a percentage of the final sale price of the home.
- Prorated property taxes. If property taxes are due, then the seller will have to cover their share before closing. If they’ve already paid their property taxes, they’ll get a credit.
If you’re still shopping around and you just want to get a ballpark range of closing costs for a particular home, you can use a closing costs calculator.
Once you’ve applied for a mortgage, the lender is legally required to send you a form called the loan estimate within three business days. The loan estimate gives you the projected interest rate, monthly payment, and closing costs. While the form provides a good idea of what you’ll have to pay, keep in mind that the figures listed are estimates and may change before closing.
The final details about your mortgage — such as what is included in your closing costs — will be in the closing disclosure, which you’ll receive at least three business days before you close on the loan. Be sure to compare the closing disclosure with the loan estimate, make note of any changes, and reach out to your lender with any questions before closing.
Ultimately, your closing costs will rely on a lot of different factors that make them difficult to calculate down to the dollar until you know all the details about the property, the loan, how much each expert charges for their services, etc.
How To Budget For Closing Costs
Generally, your closing costs can end up being anywhere from 2% to 5% of your home’s purchase price. Budgeting for the higher end of those costs should ensure you have enough to close on a home.
How To Reduce Closing Costs
Now that you understand the sheer volume of closing costs, it makes sense how they can get expensive. Don’t worry — there are a few ways to reduce your closing costs.
Consider the timing
Scheduling the closing date for the end of the month can result in lower closing costs. It might sound too easy, but there’s a reason behind this strategy. You must pay daily interest from the day of your closing to the last day of the month. So, if you close on Sept. 2, you’ll end up paying nearly a month’s worth of interest. If you close on Sept. 29, you’ll have to pay for just one day of interest.
It’s smart to compare mortgage offers and providers to get the best deal — and this includes the different fees that the lender charges. Make sure to ask your lender about the closing costs that can be waived or reduced. Beyond your mortgage lender, you also have the opportunity to shop around for certain closing costs, such as the pest inspection and homeowners insurance.
Negotiate with your lender
If you’re feeling overwhelmed by all the different closing costs, remember that some fees can be negotiated down.
“First-time buyers can find themselves in sticker shock once they find out the entire cost of purchasing a home,” says Adrienne Allen, a broker at Mojo Realty in Las Vegas. “This is why it is important to have an experienced agent to help possibly negotiate some of those fees down or find down payment assistance programs to help alleviate some of these costs.”
Negotiation can be especially effective if the seller is eager to offload the home, Allen says.
Not every closing cost needs to end up falling into your lap. As the buyer, you can try to negotiate with the seller for some concessions to lower your costs.
If the market is favoring buyers, then the seller could be convinced to pay some closing costs to finalize a sale. Conversely, if the market is favoring sellers, you’ll have little leverage, and you should expect to pay all of your closing costs.
Depending on the mortgage you take out, there may be some government-backed assistance programs available to you. The Federal Housing Finance Agency can help you locate various assistance programs specific to different national emergencies.
Other assistance programs include the Homeowner Assistance Fund from the Department of the Treasury, as well as similar funds provided by each state.
To learn more about which assistance programs you’re eligible for, you should reach out to your local, state, or municipal government housing agencies.
Here are answers to some frequently asked questions about closing costs.
You’ll receive an idea of how much they will cost with the loan estimate, which is a standardized form your lender must provide within three business days of receiving your completed application to get a mortgage. After your loan is underwritten and at least three days before your scheduled closing, you’ll get a closing disclosure with the final costs for the transaction. The costs won’t be final if changes are made after reviewing this document.
In most instances, the answer is yes. That being said, your lender may require that some fees be paid separately. Generally, all the fees will have to be paid when the property title changes hands.
The closing process is a very important step in the homebuying experience. Who needs to be present during the proceedings will depend on your specific situation. Typically, you and the seller will be joined by your attorneys, the closing agent, the real estate agents, and the mortgage lender.
The Bottom Line on Closing Costs
While you’re setting aside money to buy a home, don’t forget to factor in closing costs. They’re inevitable, there are a lot of them, and they add up. Closing costs are likely going cost you at least a few thousand dollars, but the total will vary significantly depending on the home and where it’s located. While closing costs may seem like just another homebuying expense, they signify the final hurdle before you officially close on the home and start your life as a homeowner.
Andrew Martins contributed to the reporting of this article.
- ClosingCorp (April 2022)