Closing costs: What are they and how much are they?
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Closing costs are the fees you pay when finalizing a real estate transaction, whether you’re refinancing a mortgage or buying a new home. These costs can amount to 2 to 5 percent of your mortgage loan. So it’s important to be financially prepared for this expense.
What are closing costs?
Closing costs include a range of charges for services related to applying for a mortgage and finalizing a real estate sale. Some of the costs are related to the property you’re trying to buy — appraising it to verify its value and searching property records to ensure a clear title — and others are related to the paperwork involved in the transaction, including attorney fees and the expense of originating and underwriting the loan.
Closing costs are paid at the closing, as the name implies, and usually require a cashier’s check (not a personal check).
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 professional does to determine what the home is worth. The average appraisal fee for a single-family home is $352, 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 who evaluates the home’s condition, 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 $300.
- 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.
- Property taxes – Buyers are also often required to pay six months to a year’s worth of property taxes at closing. The cost of this expense will vary depending on the state where the home is located.
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: The buyer typically pays $3.75 and the seller pays $1.50.
How much are 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
For 2021, the average closing costs for buying a single-family home were $6,905, according to real estate data firm ClosingCorp. The average closing costs for a refinance came in at $2,375.
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 $29,888. 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 ($2,061), Indiana ($2,200) and North Dakota ($2,501).
You can find a full rundown of the average closing costs by state here.
Who pays closing costs?
Most closing costs are paid by the buyer, but some are paid by the seller, such as the real estate agents’ 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.)
How much are closing costs for the buyer/seller?
Sellers are generally responsible for realtor commissions, title fees, homeowners association fees and property taxes. But instead of paying these expenses out of pocket, they typically get to deduct them from the home’s purchase price.
However, buyers will typically need to pay closing costs out of pocket. These include attorney fees, the appraisal fee, the home inspection fee, the credit reporting fee and the underwriting fee. Buyers are also on the hook for the title search fee and insurance, prepaid interest and the first premium payment for homeowners insurance.
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:
- Look for lenders that offer discounts: 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.
- Apply for down payment assistance: If you’re a first-time homebuyer, explore down payment assistance and grants that can help you cover closing costs.
- Use a no-closing-cost loan: 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.
FAQs about closing costs
In most cases, it is not possible to roll closing costs into a new mortgage. However, when refinancing a mortgage, you can include them in your loan. If you’re a new homebuyer who is looking to avoid closing costs, you can try shopping around for lenders who will pay the closing costs in exchange for a higher interest rate on your mortgage. But keep in mind that you’ll pay interest on those costs as long you have the loan.
The majority of closing costs are paid when you sign your purchase agreement and final loan documents at closing, though a few of the fees, such as appraisal and inspection fees, must be paid in advance of closing day.
It depends on the loan type, your lender’s current volume, and how fast you send over the documentation they need to process and underwrite your application. In 2021, it took the average borrower 49.9 days to close on a mortgage, according to a report from mortgage technology company Ellie Mae. Conventional loans tend to have faster closing times than government-backed products, like FHA and VA loans.