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When budgeting for a home, it’s important to understand all the costs associated with the purchase. Some numbers are pretty clear–the price of the home, the down payment you’ll need–but what about closing costs? These costs are often a mystery to home buyers until the very end when they sit down at the closing table to sign the papers. And yet, closing costs can be a significant expense for home buyers that, in the midst of everything else, can easily be forgotten.
Before you make one of the biggest (if not the biggest) purchases of your life, it’s a good idea to have a handle on what you’ll be expected to pay for come closing time. That’s why we’re breaking down everything you need to know about closing costs as a home buyer. From what they are to what’s included, you’ll be an expert by the time you’re done reading this. Let’s jump in and get started with the basics:
Other than the obvious mortgage and down payment costs, there are many other fees associated with the purchase of a home. All of these fees make up your closing costs, which come due when you close on your loan. Closing costs cover a wide range of fees including the cost of an appraisal, home inspection fees, loan-related fees, and more. Don’t worry, we’ll give you a run down of the most common fees included in your closing costs in a bit.
When we think of closing costs, we often think of buyers, but in actuality, both the buyer and the seller are responsible for paying these costs. Costs for the seller typically include the real estate commission and title transfer fees. Buyers, on the other hand, usually pay the mortgage fees, appraisal fees, and inspection fees. However, these fees are negotiable and in some cases a seller will agree to pay for a portion of these expenses.
On average, home buyers can expect to pay between 2 and 5% of the loan amount in closing costs. Lenders are required by law to provide borrowers with a Loan Estimate within three days of applying for a mortgage. This estimate lays out the expected closing costs, estimated interest rate, and monthly payment. Even though these costs are subject to change, what’s presented should be very close to the final charges you’ll see at closing.
At least three days before closing, you should receive a closing disclosure which outlines all the costs and terms associated with your loan and home purchase. The closing disclosure will include the total amount in closing costs due, as well as a detailed breakdown of all the fees that make up that total. These fees are subject to change but they should not vary significantly from what is shown on the disclosure.
Closing costs are due at closing when you sign your loan documents and officially become a homeowner. Closing costs are paid either by wiring the funds to an escrow account or by cashier's check.
Some closing costs can be negotiable including attorney fees, recording costs, and messenger fees. It’s also possible that the seller may chip in to cover some of the buyer’s closing costs to seal the deal. But in competitive real estate markets, this may not be likely.
Now that you have a better handle of what closing costs are, who pays for them, and how much you can expect to pay, let’s jump into the nitty-gritty. Here are the most common fees included in a home buyer’s closing costs:
Average Cost: $300-500
Typically, your lender will require a home inspection to ensure the home you’re buying is in good condition. This fee covers the cost of the inspection.
Average Cost: $300-400
Your lender will typically require that your property is appraised by a professional home appraiser to find out the true value of your home. This is mainly so the lender doesn’t lend you more money than you need to buy the home. This fee pays for the cost of the appraisal.
Average Cost: Varies
This fee, sometimes referred to as a closing fee, is paid to the title company, escrow company or real estate attorney for conducting the closing of the transaction as an independent third party.
Average Cost: $15-20
If the home you’re buying is located near a flood plain (or flood zone), your lender may require documentation to confirm this. To do this, you’ll need to get a certification from the Federal Emergency Management Agency (FEMA).
Average Cost: Varies (typically by county)
Your local city or county recording office will charge a fee for recording the purchase or sale of a home and updating the public land records.
Average Cost: $300-450
This fee is for the survey of your property. A property survey verifies property lines and makes note of any shared structures like fences.
Average Cost: Varies
Typically, you’ll be responsible for paying two months of city and county property taxes at closing.
Average Cost: Varies
This tax is imposed when the title is transferred from one owner to another. The cost varies by municipality.
Average Cost: Varies
If you’re moving into a development with a homeowners association (HOA), you may be required to pay their annual fee upfront. This cost does not include the HOA transfer fees which the seller is usually responsible for paying.
Average Cost: $200-400
This fee covers the cost of processing your loan application. It often includes the cost of a credit check and the administrative costs of your lender. Lenders don’t always charge an application fee and if they do, the fee can often be negotiated.
Average Cost: 0.5-1% of your loan amount
This fee is charged by your lender for the administrative duties associated with evaluating and preparing your loan. It may include other fees as well, such as notary fees or the lender’s attorney fees, and may also be referred to as an underwriting, administrative, or processing fee.
Average Cost: Typically 1% of the loan balance
If you assume or take over the remaining balance of the seller’s loan, you may be required to pay an assumption fee.
Average Cost: Varies (based on hourly rate)
This cost is for an attorney to review your closing documents on your or your lender’s behalf. This fee is not required in all states, but is in Texas.
Average Cost: Varies (based on loan amount)
Buyers are responsible for paying interest that accrues between the date of your closing and the due date of your first monthly mortgage payment. For instance, if you close on August 15th, you’ll owe interest on your loan from August 15th to September 1st.
Average Cost: 1 point equals 1% of the loan
Discount points are paid to your lender at closing in order to reduce the interest rate on your loan. Paying this additional upfront cost is generally only advised when you plan to stay in the home for a long time.
Average Cost: Varies by lender
As the name implies, this fee covers the cost of your application for PMI insurance. If you’re unable to put 20% down on your home, then you’ll be required to get PMI insurance, which insures your lender if you end up defaulting on your loan.
Average Cost: 0.55%-2.25% of your mortgage insurance purchase price
Your lender may require you to pay a portion of your mortgage insurance upfront at closing. This is typically either the first year’s mortgage insurance premium or a lump-sum payment covering the life of the loan. If you’ll have PMI, you’ll likely have to pay the first month’s premium payment at closing.
Average Cost: FHA: 1.75% of your loan plus a monthly fee; VA: 1.25%-3.3% of your loan, dependent on your down payment; USDA: 1% of your loan
FHA, VA, and USDA loan types charge different fees than those of a conventional loan. If your loan is insured by the Federal Housing Administration, you’ll be required to pay a portion of your FHA mortgage insurance premium upfront. If your loan is guaranteed by the Department of Veterans Affairs or the U.S. Department of Agriculture, you’ll have to pay guarantee fees at closing.
Average Cost: Varies
Homeowners’ Insurance covers the cost of any damage to your home. Typically, you’ll pay the first year’s insurance premium upfront at closing.
Average Cost: $75-200
This fee is paid to the title company to ensure the title is clear. In other words, that the individual selling the home actually owns it. They’ll also make sure there are no claims or liens against the property.
Average Cost: Varies
Generally, lenders will require a loan insurance policy. This protects the lender in the instance there is an error with the title search and someone claims ownership on the property after it’s been sold. The policy is effective for the life of the loan.
Average Cost: 0.5-1% of the purchase price
The owner’s title insurance policy protects you (the buyer) if someone comes forward to claim ownership of your home after closing. This lasts for as long as you own the property.
The costs of purchasing a home can really add up, but it’s better to be informed than left in the dark. When you set out to buy a home, it’s a good idea to budget in 2-5% of what you’ve saved to go towards closing costs. That way, when it comes time to sit down at the closing table, you’ll be fully prepared.
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