Whether you’re buying a new home or refinancing your mortgage, you need to be financially prepared to pay closing costs. These fees typically add up to somewhere between 2 percent and 5 percent of the amount you’re borrowing.
What are closing costs?
Closing costs include a wide range of charges for services related to applying for a mortgage. Some of these costs are related to the property — appraising it to verify its value and searching property records to ensure a clear title — and others are related to the paperwork involved, including attorney fees and the expense of originating and underwriting the loan.
Closing costs are separate from the down payment, and you usually need to get a cashier’s check (not a personal check) to pay them.
How much will I pay in closing costs?
The total tab for your closing costs depends on three key factors:
- The price of the home
- Its location
- Whether you’re buying or refinancing
As of the first half of 2021, the average closing costs for buying a single-family home added up to $6,837, according to real estate data firm ClosingCorp. The average closing costs for a refinance came in at $2,398.
Those costs vary widely across the country, however, partly due to tax differences. Homebuyers in Washington, D.C., for example, paid the highest average closing costs, at $30,352. Delaware and New York came in second and third, respectively, with average closing costs above $17,000. The cheapest closing costs were found in the middle of the country: Missouri ($2,102), Indiana ($2,193) and North Dakota ($2,321).
Types of closing costs
Closing costs are bucketed into two main categories: property-related fees and mortgage-related fees.
The closing costs associated with the property are the expenses that help verify the home’s ownership and value. This is important, because the home is the collateral for the mortgage.
- Appraisal fee – The appraisal fee covers the work a licensed appraiser does to determine what the home is worth. The average appraisal fee for a single-family home is $348, according to HomeAdvisor, but you’ll likely pay more for a larger home. While this is considered a “closing” cost, you typically pay this well before closing day.
- Home inspection fee – Separate from the appraisal, the home inspection fee goes to the home inspector that evaluates the home before closing, and usually runs a few hundred dollars. While an inspection is technically optional, it’s best to have one so you’re aware of any problems with the home. (What a home inspection won’t do, however, is tell you how much those problems could cost to fix.)
- Title search – Unless you’re buying a brand-new home, your lender will have a title company search property records to ensure there aren’t any issues with the title of the home, such as a tax lien. The fee for a title search is around $450.
- Title insurance – Lenders require borrowers to obtain title insurance in case there are issues with ownership after the sale. This policy protects the lender, and the cost is usually 0.50 percent to 1 percent of the amount you’re borrowing for your mortgage. For an additional cost, you might choose to purchase your own title insurance policy, as well, to protect your financial interest in the home.
There are also closing costs associated with creating the mortgage, including fees from the lender.
- Credit report fee – The credit report fee is what your lender charges to check your credit report and score. This fee can be $25 or more per borrower.
- Origination fee – Lenders can charge a fee for creating the loan, known as an origination fee, which is generally equal to 0.5 percent to 1 percent or more of the amount you’re borrowing. This fee is essentially how lenders make money.
- Application fee – Some lenders charge a fee of several hundred dollars to process your loan application.
- Underwriting fee – This might also be called an administrative or processing fee, and it covers the cost of evaluating and verifying your financial qualifications and eligibility. This might be a flat fee, or it could be expressed as a percentage of the loan, such as 0.5 percent of the amount you’re borrowing.
- Points – To lower the interest rate on your mortgage, you might also opt to pay another charge known as mortgage points or discount points. Many lenders allow borrowers to pay points in exchange for a lower rate. While this raises your closing costs, it can make a big difference in the amount of interest you’ll pay over the life of the loan.
Outside of these loan- and property-related costs, you might pay additional fees at closing, such as an attorney’s fee. Most real estate lawyers charge by the hour, and rates vary.
Some cities and states impose fees on real estate transactions, too. For example, if you’re purchasing a home in Chicago, you and the seller split a transfer tax of $5.25 per $500 of the sales price, where the buyer typically pays $3.75 and the seller pays $1.50.
Who pays closing costs?
Most closing costs are paid by the buyer, but some are paid by the seller, such as the real estate agent’s commission. As the buyer, you might try to negotiate some of your costs into the seller’s corner, such as homeowners insurance and property tax escrow deposits, flood and hazard insurance premiums and per-diem interest. (In a seller’s market, however, you might not be successful.)
Closing cost documents
Once you apply for a mortgage, you’ll receive a loan estimate from the lender with cost estimates of the loan, including closing costs. Once your mortgage is cleared to close, you’ll receive a closing disclosure, which includes much of the same information as your loan estimate, but with the exact numbers you can expect to pay at closing and after.
This disclosure is required to arrive at least three business days before you’re scheduled to close. When you receive it, be sure to review it immediately to address any errors or issues so you can avoid overpaying.
How to lower your closing costs
While you can’t avoid paying all closing costs, there are some that can be negotiated, potentially saving you money. Here are a few tips:
- Consider working with a mortgage lender that doesn’t charge an origination fee, or that’ll offer you a discount. If you’re getting your mortgage at your bank, you can also try asking for a discount or fee waiver, since you’re already a customer.
- If you’re a first-time homebuyer, explore down payment assistance and grants that can help you cover closing costs.
- Look into a no-closing-cost loan — but don’t let the name fool you. No-closing-cost loans do, indeed, still charge closing costs; they are simply rolled into the principal, so you’ll be paying them back, with interest, with your mortgage.
How to budget for closing costs
Before you start looking at homes, get preapproved for a mortgage so you understand what your closing costs could be and how much home you can afford.
Since a number of factors, such as the type of loan, type of property, type of occupancy and your credit score can determine what your closing costs might be, try to be as specific as you can with the mortgage lender, says Brett Warren, director of Residential Mortgage Lending at Hyperion Bank in Philadelphia.
“Closing costs are often higher than most borrowers initially assume they are,” Warren says.
With that in mind, budget with the high end — 5 percent of the loan — in mind. Between paying for movers, handing over a down payment and checking off all your other expenses, the run-up to closing day carries a hefty price tag, so being prepared is key.
Lastly, follow these tips for saving money on a tight budget to reduce your costs — and your stress.