When you’re preparing to buy a home, getting a good purchase price and mortgage interest rate will likely be 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 that you need to pay to your lender when you close on your home. They cover a variety of loan fees, taxes, insurance, 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, what they mean, 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
- How To Reduce Closing Costs
- The Bottom Line on Closing Costs
What Are Closing Costs?
Closing costs consist of the different fees that you pay when you take out a mortgage. What do closing costs include? To name a few, they can encompass 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 seal the deal.
On closing day, you’ll need to bring your cash to close, which includes your down payment and closing costs. Your closing agent can advise on the preferred payment method, which is typically a cashier’s check.
Who pays closing costs on a house?
While the buyer and the seller both pay closing costs, the buyer typically takes care of the lion’s share.
The seller covers the real estate agents’ commissions, their own legal fees, any homeowners association fees, prorated property taxes, transfer taxes, recording fees, owner’s title insurance, and half of the escrow fees.
Generally, the buyer covers everything else — unless the seller is providing credits to cover part of the buyer’s closing costs as part of the home purchase agreement.
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%
- Federal Housing Administration (FHA) loans: 6%
- U.S. Department of Agriculture (USDA) loans: 6%
- Department of Veterans Affairs (VA) loans: 4%
In exchange for a higher interest rate, the lender may also offer credits to offset a portion of the buyer’s closing costs. But with lender credits, you’re still paying those closing costs — they’re just rolled into your loan, which means you’ll pay more interest over time.
How Much Are Closing Costs on a House?
Closing costs can differ from buyer to buyer based on several factors, including 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, according to Freddie Mac. So, if the house is worth $300,000, then you’ll likely pay $6,000 to $15,000 in closing costs.
The national average for closing costs was $6,087, including taxes, for a single-family property in 2020, according to a report from ClosingCorp, which provides residential real estate closing cost data and technology. However, this number can vary widely depending on where you live.
The data found that the following locations had the highest and lowest average closing costs:
- Places with the highest average closing costs, including taxes:
- Washington, D.C. ($29,330)
- Delaware ($17,727)
- New York ($13,262)
- Places with the lowest average closing costs, including taxes:
- Missouri ($1,571)
- Indiana ($2,101)
- Kentucky ($2,229)
Calculating your closing costs
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 cost 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 aren’t final.
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 against the loan estimate, make note of any changes, and reach out to your lender with any questions before closing.
Can you waive closing costs?
If you’re concerned about closing costs, you can ask your lender to waive or reduce some of the fees. Using lender credits allows you to downsize your upfront costs and pay a higher interest rate on your loan instead. While this option may sound appealing due to lower short-term costs, be warned that you’ll be paying more in interest over time. With no-closing-cost or zero-closing-cost mortgages, it’s a similar deal — the closing costs are baked into either the loan amount or the interest rate.
If you can’t get your lender to waive any closing costs, it may seem tempting to skip certain services — like the home inspection — to save money. However, it’s in your best interests to find out about any major flaws in the home that might be expensive to repair down the line.
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 can vary from situation to situation, so the fees listed aren’t absolute.
- Application fee: Lenders may charge a fee to process your mortgage application. This fee 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. The assumption fee for a conventional loan is generally $800 to $1,000.
- Credit reporting fee: This covers the cost of pulling your credit and ranges from $10 to $100 per credit report.
- Discount points: By paying points, you score a lower interest rate in exchange for a bigger upfront payment. The cost of buying points varies depending on how much your lender charges.
- 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 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 sets your interest rate for the period 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 live 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 $500.
- Survey fee: A land survey verifies the boundaries of your property and usually 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, you’ll almost certainly pay a nonrefundable, upfront guarantee fee that costs no more than 3.5% of the mortgage amount.
- VA funding fee: With VA loans, you must pay a fee to help fund the program. If you put at least 10% down, 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.
- Homeowners association fees: If you’re purchasing property in a community governed by an HOA, you need to pay prorated dues at the closing. These fees vary depending on your HOA community.
- Homeowners association transfer fee: This covers the cost of transferring HOA fee obligations from the seller to the buyer. It’s often covered by the seller.
- FHA mortgage insurance: With FHA loans, you must pay a mortgage insurance premium, which costs 1.75% of your loan amount.
- 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 you aren’t missing any payments.
- Transfer tax: Your local government charges a transfer tax to update the home’s title and transfer it to you. This tax varies by location and is either a flat fee or based on the purchase price.
- Attorney fee: Your state may require you to involve 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 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 unpaid back taxes. It can cost $200 to $400.
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 your 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, that equals just one day of interest.
It’s smart to compare loan 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.
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 real estate technology company Homie 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, according to Allen.
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. Plan for closing costs to amount to 2% to 5% of your purchase price. That’s likely going to be at least a few thousand dollars, but the total will vary significantly depending on the home and where you live. 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.