What Are Closing Costs and How Much Will You Pay?

If you’re a first-time homebuyer, it’s easy to get caught up in the excitement of making plans for your new space. Even as you dream about color schemes, furniture placement, and the ideal layout of your new home, you’re probably also keeping a close eye on interest rates and your future mortgage payment. However, there are other transaction details you can easily overlook, such as the myriad of additional costs and fees charged to buyers as part of their home purchase transaction. These added expenses are called closing costs.  

So, if you’re currently renting a home in Sacramento, CA, or an apartment in Minneapolis, MN, it’s easy to underestimate just how much you’ll need to pay in closing costs. Keep reading to learn more about closing costs, what to expect, and how much you may need to pay.

What are closing costs? 

As your closing date approaches, your lender will provide a closing disclosure for you to review. It may be the first time you see an itemized list of one-time fees to pay on closing day in addition to your down payment. These standard closing costs pay the various parties involved in transferring ownership of the house from the previous owner to you. It’s important to review this disclosure for accuracy and to understand the various charges. This is the time to ask any questions before the deal is final. Here is a sample closing disclosure to familiarize yourself with the form.

What does a closing disclosure include? 

Your disclosure will itemize your loan terms and the breakdown of the purchase price, principle, interest, payment amounts, and any fees associated with securing the loan. Capital Funding Financial shares a list of typical charges you’ll see on the closing disclosure:

• Lender Origination Points (often 1% – 3% of the loan amount)
• Buydown Points (any fee related to “buying down” or “lowering” the interest rate below PAR)
• Third-Party Fees (such as the appraisal, title policy, taxes, credit report fees, survey, and HOA fees)
• Prepaid Interest
• Taxes owed to the City or County
• Escrows required by the lender
• Property Insurance (Flood, Liability, Hazard, depending on where the property is located)

You want to ensure you understand the math and run through it yourself to double-check the numbers. No matter how professional and experienced your lender’s team is, mistakes happen now and then.

As you’ve seen from the example closing disclosure statement, the amounts can be significant enough to have you scrambling at the last minute if you’re not prepared. Your lender should provide both timely and reliable estimates, but you can get ahead of the curve by calculating your own estimates so you’ll have a good idea of what to expect.

Who pays closing costs?

Closing costs are paid according to the terms of the purchase contract made between the buyer and seller. Typically, most of the closing costs will be paid by the buyer. The buyer will receive the closing disclosure and will be expected to pay the charges, but there are instances when the seller may have to pay some fees at closing too.

How do I estimate closing costs? 

Several factors influence your closing costs, and as a result, these costs are not set in stone and will vary from one home purchase to the next. 

Factors to include in your closing costs:

• The purchase price of the home
• Your down payment amount
• The type of loan you choose 
• Any adjustments you negotiate with the seller 

Typically, closing costs run between 2% and 5% of the price of your home. On a home purchased for $300,000, closing costs could range from $6,000 to $15,000, which is a significant range. 

As an example, the median sale price for a single-family home in September 2022 was $402,983. So the average closing costs for such a home could range between $8,059 and $20,149 (2-5% of the purchase price). This amount covers taxes, bank fees, and third-party fees such as the title company’s charges.

Estimate your closing costs by preparing for an amount at the higher end of the range. This will hopefully leave you with extra money if your closing costs come in lower.

Expert Insights

“The best way to budget for closing costs when purchasing a property is to factor in a conservative 5% cushion on what you will need to bring to close and request for the seller to offer some type of credit or concession for closing costs in the offer,” suggests Capital Funding Financial.

“Buying a home is not a race; it’s a marathon, so buyers should plan accordingly by having the financial ability to get the home they desire under contract,” says Valor Home Mortgage, a military veteran mortgage lender in Rincon, GA. “In most markets today, the buyer still needs to have some money available to cover closing costs if the seller is unwilling to give concessions to cover some or all of the buyer’s closing costs.”

How do closing costs affect a home purchase? 

This is an excellent question, one that more homebuyers need to ask. Before closing on the property, you have likely paid several fees already.

As part of your contract, you paid earnest money to secure the property. This payment showed the seller that you were a good-faith buyer who planned to move forward with the home purchase. Earnest money usually applies to the downpayment but can also be used for closing costs. 

To secure a mortgage, the lender requires an appraisal. An appraisal fee ranges from $300-$650 depending on the home’s size, purchase price, and distance the appraiser must travel. You may pay this in advance, or it may show up as an item on the closing disclosure statement, which will become payable on the day of closing. 

If your contract included a home inspection contingency, an inspector would have performed a home inspection which you’ll also have to pay for. During this process, the home inspector looks for damage or potential issues with the home’s plumbing, heating, and electrical, as well as the structural items such as roofing, siding, windows, and foundation. Home inspections can cost upwards of $500, depending on the home’s size. You may have paid this upfront, or it may likely be a charge on the closing disclosure statement. 

Most of these contingencies and fees should be satisfied to fulfill your purchase contract. They should not appear on the closing disclosure if you paid them directly to the service provider. They will be payable on the final closing day if you don’t pay them ahead of time.

Here are the most common closing-related costs payable on the day of closing

Lender fees 

Lender fees include credit report fees, points, flood determination, homeowners insurance, and private mortgage insurance (if applicable). 

There are two types of points in a mortgage process—origination points, and discount points. Homebuyers can prepay discount points as a way to lower their interest rate. In some cases, you can use points money toward closing costs. Origination points are the fees your lender charges for the upfront work to secure your loan. 

Lenders may also require a flood determination to ascertain if the property lies in a flood plain. The borrower pays the cost of the determination. If the home exists within a flood plain, your lender will require you to get special flood insurance for the property. 

Your lender will also require proof of homeowners insurance before releasing funds for the purchase. The lender will need the first year’s insurance to be paid by closing. You can make future payments through escrow if you set your mortgage payments up to collect that from you monthly. 

You will also see charges for documents and processing fees or loan origination fees. These fees can include loan application processing, underwriting, and other services.

“Closing costs are a combination of lender fees, title fees, and setting up your escrow accounts for taxes and insurance payments,” explains Josip Rupena, founder and CEO of Milo. “The section that your mortgage company can impact is the lender fees. The other two depend on the title company you choose as well as the property tax collection and insurance requirements for your property.”

Third-party fees

These are fees charged by the title company to complete all of the necessary background checks on the property. The title company will perform a title search to ensure the seller is the actual owner of the property and to make sure there are no liens against the property or other issues that may prevent the sale. As part of this process, the title company issues title insurance to protect against past defects in the property’s title, such as forged documents, undiscovered heirs, or undisclosed liens—to allow for a clear title for purchase. 

Your title company will also check local tax records to ensure the previous owner has all taxes paid up to date. If not, the seller must settle all payments before closing on the home. The tax information allows the title company to prorate the new buyer’s taxes. For example, if you close in September, the previous owner will be credited taxes paid through the last three months of the year. As the new buyer, you will see a tax charge for the last three months of the year. 

The title company also checks for unpaid utility charges and homeowner association fees, and unpaid charges will be part of the tax bill. The previous owner will have to clear any outstanding fees before closing. 

You’ll also pay your agent and seller’s agent real estate commissions at the final closing. These fees will show up on the closing disclosure statement. If you negotiated with your real estate agent for a reduced commission, be sure to double-check those commission numbers.  

Other potential homebuyer fees

If you buy the property without a real estate agent’s help, you may want to hire an attorney to review your contract or represent you throughout the purchase process. Attorney fees are typically paid directly and at the time of closing. 

By now, you know that purchasing a home is a dynamic process that demands your careful attention. Many moving parts need to fall into place to determine the final closing amount. If you paid a fee at any point along the way, keep track of it and closely examine your closing disclosure statement. This way, you won’t pay twice.

“It’s also important to enquire about property taxes and HOA fees when touring homes,” says Assurant Home Loans in Irving, TX. “When deciding between mortgage lenders, be sure to compare rates and other charges. Get a quote from multiple title companies to compare their charges before signing the contract. Shop around for homeowners insurance and check if bundling with your auto insurance saves you any money, and analyze if escrow waivers suit your situation.” Along with closing costs, these factors will also impact how much house you can afford.

Possible seller credits

For some home purchases, certain repairs identified in home inspection reports do not get completed, or the seller offered an allowance for the new owner to complete the work after closing. These items will show up on your closing disclosure statement as a credit from the seller. In effect, such credits lower the purchase price and reduce closing costs. A typical allowance might be for new carpeting or new appliances.

Is it possible for closing costs to change? 

Yes, your closing costs could change at the last minute. For example:

• If the home appraises for less than the sales price, the buyer and seller may have to renegotiate the price. 
• A title search could turn up a problem, such as a lien on the property. 
• If the interest rates jump, you may want to change the type of loan you take out as the buyer. You may also decide to pay more or less for a downpayment. 
• Before releasing the final funds, the lender may find a new issue with your credit history. A situation like this could change the closing costs if you need to pay down a credit line with loan funds or if the credit issue affects your interest rate and points.

6 Expert tips for lowering closing costs

As mentioned above, closing costs are paid based on the terms of the purchase contract between the buyer and seller. As a buyer, you can negotiate prices and fees with any party involved in the purchase process to reduce closing fees. Here are six expert tips on reducing closing costs:

1) Generally, the buyer, or borrower, pays for closing costs. However, you can sometimes negotiate for the seller to pay some of these costs, known as “seller concessions.” For instance, you can make an offer on a house and ask that the seller pays for the inspection, the home warranty, or other closing costs. – Aslan Home Lending in Denver, CO

2) For buyers that prefer to keep more cash in their pocket, it’s wise to consider asking for a seller to pay the buyer’s closing costs instead of a reduced purchase price. This can be a great way for buyers to spend less out of pocket when purchasing a home while still negotiating a good deal in the current market. When taking this approach, one thing to consider is that the seller will net the purchase price minus the amount paid toward the buyers closing costs. For example, if a home is on the market for $300,000, a buyer can ask for $10,000 in closing costs vs. offering $290,000. The offer is virtually the same for the seller. – Bayer Home Loans

3) Be sure to work with a mortgage lender that does not charge borrowers any lender fees, origination fees, or points to obtain a rate while still offering the borrower better rates. A borrower should always research online against any mortgage company they are interested in working with and ask many questions before committing their business to that company. – Valor Home Mortgage

4) Another option is to negotiate with the lender to include lender fees in the loan, reducing your upfront fees. However, it’s important to note that while this lowers closing costs, it will increase your monthly payment and cost you more in interest over the life of the loan.- Capital Funding Financial

5) You can also lower closing costs by getting an appraisal waiver. For buyers who qualify, they can skip the in-person appraisal visit. Instead, the lender will use data provided by an automated underwriting system to determine the value of the home being sold, such as real estate comps and the previous selling price of the house the buyer is purchasing. – Michael Petrovich of  Petrovich Team Home Loan LLC

6) Consider using lender credits to offset closing costs. This is another way for buyers to reduce closing costs. Lender credits are when the lender agrees to cover all or part of a buyer’s closing costs. In exchange, the borrower pays a higher interest rate to repay any fees the lender covers. Lender credits can help the buyer avoid the upfront costs of buying a house so you can put more of your savings toward a down payment. – Amerifund Home Loans in Simi Valley, CA

Homebuyers should plan for closing costs

As the clock ticks down to your closing date, the last thing you want is an issue popping up and causing the sale to fall through. You can eliminate this last-minute stressor when you prepare properly for closing costs. 

Conventional loans require a downpayment of 20% of the home’s purchase price to eliminate private mortgage insurance (PMI). If it’s going to be challenging to come up with an additional 2-5% for closing costs, it may be worth making a smaller downpayment. You can then put the difference towards the closing costs and finalize the home’s purchase. Though you will have a slightly higher mortgage payment with PMI, you’ll still be able to close on the house.

Can homebuyers receive assistance for closing costs?

Many first-time homebuyer programs can assist homebuyers with down payment and closing costs. Many of these programs specifically serve first-time homebuyers, especially buyers with moderate and lower incomes. A first-time homebuyer is anyone who has not owned a home in the last three years. So, if you’ve owned a home previously, you might still qualify for one of these programs as long as you have not owned a house recently. 

You can also use monetary gifts from friends and family to pay closing costs as a homebuyer. Ask your lender about any gift letter requirements and limits on amounts. 

Many fees and costs make up the final closing costs when buying a home. Don’t let all of the numbers intimidate you. Ask your lender, title company, or your real estate agent to clarify if you have questions. It’s their job to help buyers and sellers finalize a property transfer. Just like you, they want the transaction to proceed smoothly – so you can move into your new home and begin enjoying your new space.

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