The last step before getting the keys to your new home is signing for a mortgage, and that means it’s time to settle up those expensive closing costs.
Closing costs are the thousands of dollars in fees associated with a mortgage, typically amounting to 2 percent to 5 percent of the loan principal. There are various closing cost components and they vary from state to state. Some closing-related items can be negotiated by a consumer.
Closing costs include an appraisal, credit check and title search. When people refinance a mortgage or obtain a home equity loan or home equity line of credit, closing costs have to be paid again.
Here’s a breakdown of typical closing cost items and amounts.
How much are closing costs?
How much you’ll pay in closing costs depends on the price of the home, how tight the local market is and the location. The average total for closing costs in the U.S. is $4,876, according to ClosingCorp, a real estate data firm. A survey by the firm last year determined that the highest closing costs were in the Northeast. Some examples: the District of Columbia ($12,573), New York ($9,341), Delaware ($8,663), Maryland ($7,211) and Vermont ($6,839). States with the lowest average costs in the survey included Missouri ($2,905), Indiana ($2,934), South Dakota ($2,996), Iowa ($3,138) and North Carolina ($3,206).
What are the fees associated with closing costs?
Appraisal fee: The appraisal fee pays for a licensed professional to determine what the home is worth before a lender will extend a mortgage offer. Estimating the market value of a single-family home will typically range from $300 to $450 or more for a larger home.
Credit report fee: The credit report fee is what the lender charges to check your credit score and obtain a credit report. The fee is $25 or more per individual borrower on the loan.
Origination fee: Lenders sometimes charge a fee for initiating the loan. It can range up to about $125.
Application fee: Some lenders charge a fee of several hundred dollars to process the application.
Title search: If you’re buying other than a new property, lenders will send someone to search local property records for the title of the home to make sure there aren’t any issues with ownership or liens. The fee is around $450.
Title insurance: Lenders require obtaining title insurance in case there are issues with ownership after the sale. This protects the lender and the cost is usually 0.50 percent to 1 percent of the loan amount. The homeowner may wish to purchase title insurance to protect their financial interest in the property and that’s an additional cost.
Underwriting fee: This may also be called an administrative or processing fee and it covers costs to evaluate and verify your mortgage. This might be around 0.5 percent of the loan amount.
Most homebuyers will pay 2 percent to 5 percent of the purchase price of their home in closing costs, says Jackie Boies, senior director of housing and bankruptcy services for Money Management International, a Sugar Land, Texas-based nonprofit debt counseling organization. For a $200,000 mortgage, in addition to your down payment, you should expect to pay another $4,000 to $10,000 in closing costs.
Other cities and states can charge additional fees. Purchasing a home in Chicago, for example, means a transfer tax paid by the buyer of $7.50 per $1,000 sales price, says Esther Phillips, senior vice president of Chicago-based Key Mortgage Services.
How to avoid some closing costs
While you can’t avoid paying all the closing costs, there are some that can be negotiated, potentially saving you money. Shop mortgage lenders to compare these fees, some of which vary by lender, Boies says.
“Many fees are not set in stone and the lender has some latitude to adjust them, but you’ll need to ask about each one individually,” Boies says. “If a fee isn’t clear, ask the lender what it covers specifically and if it doesn’t make sense, ask for the fee to be waived.”
Who pays closing costs?
While most fees are traditionally paid by the buyer and some by the seller, some can be negotiated, depending upon the market. Typically, many buyers believe the only fee that sellers ever pay is the realtor’s commission, but savvy buyers can sometimes negotiate some of the other costs into the seller’s corner. It’s not unusual for buyers to persuade sellers to share some expenses that are paid in advance, including tax and insurance escrow deposits, flood and hazard insurance premiums, property taxes and per-diem interest.
“If the seller is urgent about selling the home, he or she may be willing to take on more of the (buyer’s closing) costs,” Boies says. In a buyer’s market the seller may be more willing to pay more of the buyer’s closing costs than they otherwise would.
How to prepare for closing costs
One option to prepare for closing costs is consult a lender before you start looking at homes to understand what all the costs will be based on the type of property you’re buying, says Phillips. That’s why a mortgage preapproval is recommended.
Since a number of factors, such as the type of loan, type of property, type of occupancy and credit score, determine what the closing costs may be, try to be as specific as you can with the mortgage providers, says Brett Warren, director of residential mortgage lending for Hyperion Bank in Philadelphia.
“Closing costs are often higher than most borrowers initially assume they are,” Warren says.
Budgeting for closing costs in addition to the down payment is also helpful, says Kurt Westfield, a managing partner at WC Equity Group, a Tampa, Florida-based real estate services company.
The key is to be patient and prepared since the homebuying process can be lengthy.
“Don’t rush into what will likely be the largest purchase of your life,” Boies says. “Many borrowers are unprepared for the actual cost of purchasing a home and deplete their savings to cover the closing costs.”