Closing Cost: What Are They, And How Much Will I Pay?

What Are Closing Costs On A House?

Closing costs are an essential aspect of purchasing a home that many buyers often overlook. These costs encompass a variety of fees and expenses related to the property transaction, including lender fees, title insurance, appraisal fees, and more. Typically, closing costs amount to about 2% to 5% of the home’s purchase price. For example, if you’re buying a $300,000 house, your closing costs could range between $6,000 and $15,000. It’s crucial to understand and anticipate these costs, as they can significantly impact your budget and overall home-buying experience.

How Much Are Closing Costs?

The exact amount of closing costs varies depending on several factors, such as the property’s location, the type of mortgage loan, and the specific services required for the transaction. According to a 2020 study by ClosingCorp, the national average for closing costs, including taxes, was $5,749. However, it’s essential to note that this figure can differ greatly based on the factors mentioned earlier. For instance, states with higher property tax rates, such as New York and New Jersey, tend to have higher closing costs. Additionally, certain mortgage loan types, such as VA or FHA loans, might have unique fees or requirements that can affect the total closing costs. To get a better understanding of your potential closing costs, consult with your lender and real estate agent, and request a Loan Estimate early in the mortgage application process.

Average Closing Costs By State in United States

Who Pays Closing Costs?

Closing costs are an essential part of any real estate transaction and can significantly impact the finances of both the buyer and the seller. The division of these costs depends on the type of mortgage loan and specific terms negotiated between the buyer and the seller. Here’s an overview of who typically pays closing costs for different mortgage loan types:

Conventional Loans

In a conventional loan scenario, both the buyer and the seller share the closing costs. The buyer is usually responsible for covering fees such as loan origination, appraisal, and credit report fees. The seller, on the other hand, typically covers the real estate agent’s commission, title insurance, and transfer taxes.

FHA Loans

For Federal Housing Administration (FHA) loans, the buyer is responsible for most closing costs, including the upfront mortgage insurance premium. However, the seller can contribute up to 6% of the purchase price toward the buyer’s closing costs if negotiated.

VA Loans

In the case of Veterans Affairs (VA) loans, the buyer is responsible for several closing costs, such as the VA funding fee, credit report fees, and appraisal fees. The seller can also contribute toward the buyer’s closing costs, but their total contribution is capped at 4% of the loan amount.

Jumbo Loans

For jumbo loans, the allocation of closing costs is often negotiable between the buyer and the seller. The buyer is typically responsible for most fees, such as loan origination and appraisal fees, while the seller may cover some costs like real estate agent commissions and title insurance.

How Much Are Closing Costs For A Buyer?

Closing costs for a buyer can vary depending on the type of loan and the specific fees required for the transaction. Below is a breakdown of common fees a buyer may encounter during the home-buying process:

Application Fee

The application fee covers the lender’s cost of processing your loan application. This fee can range from $100 to $500.

Appraisal

The appraisal fee pays for a professional assessment of the property’s value, ensuring the loan amount is appropriate. Appraisal fees can range from $300 to $500.

Attorney Fees

Some states require an attorney to be present during the closing process. The attorney fees can range from $500 to $1,500.

Closing Fee

The closing fee, also known as the settlement or escrow fee, is charged by the title or escrow company for facilitating the closing process. This fee can range from $500 to $1,500.

Courier Fee

Courier fees cover the cost of transporting documents during the loan process. These fees can range from $25 to $100.

Credit Reporting Fee

The credit reporting fee is charged by the lender to obtain your credit report from one or more credit bureaus. This fee can range from $25 to $50.

Discount Points

Discount points are an optional fee paid upfront to reduce your mortgage interest rate. One discount point typically costs 1% of the loan amount and can lower your interest rate by around 0.25%.

Escrow Funds

Escrow funds are held by a third party to cover expenses such as property taxes and homeowners insurance. The amount required depends on the property’s value and location.

FHA Mortgage Insurance

FHA loans require an upfront mortgage insurance premium (MIP) and an annual MIP, which are typically paid by the buyer. The upfront MIP is 1.75% of the loan amount, while the annual MIP varies depending on the loan’s term and down payment.

Flood Certification

The flood certification fee is charged by the lender to determine if the property is located in a flood zone. This fee can range from $15 to $50.

Homeowners Association Transfer Fee

This fee applies if your new home is part of a homeowners association (HOA). It covers the cost of transferring HOA ownership from the seller to the buyer. This fee varies widely depending on the specific HOA.

Homeowners Insurance

Homeowners insurance covers potential damages to your home. It’s usually required by lenders and is typically paid for the first year at closing. The cost can range from $300 to $1,000 per year, depending on the property and coverage level.

Loan Origination Fee

The loan origination fee is charged by the lender for processing the new loan. It typically ranges from 0.5% to 1% of the total loan amount.

Lender’s Title Insurance

Lender’s title insurance protects the lender against problems with the title to your property. This one-time fee is typically based on the amount of the loan.

Lead-Based Paint Inspection

This inspection fee applies if the home was built before 1978. A professional inspector is hired to check for the presence of lead-based paint. The inspection can cost between $200 and $400.

Owner’s Title Insurance

Owner’s title insurance protects the homeowner against any future claims against the property’s title. The cost of this insurance varies but it’s typically around 0.5% to 1% of the purchase price.

Pest Inspection Fee

A pest inspection is often required to check for termites or other pests. This fee usually ranges from $50 to $150.

Prepaid Daily Interest Charges

These charges accrue from the day you close to the end of the month, before your mortgage payments begin. The amount depends on your loan size and interest rate.

Private Mortgage Insurance (PMI)

If your down payment is less than 20% of the home’s price, you’ll typically have to pay PMI. The cost varies, but it’s typically between 0.5% and 1% of the total loan amount per year.

Property Tax

Buyers often have to pay a few months’ worth of property tax at closing. The amount depends on the local tax rate and the home’s value.

Rate Lock Fee

Some lenders charge a rate lock fee to guarantee your quoted interest rate for a certain period of time. This fee varies by lender and loan type.

Recording Fee

This fee is charged by a local recording office to record public land records. It typically ranges from $25 to $250.

Survey Fee

A survey fee covers the cost of verifying the property’s boundaries. This fee can range from $200 to $800.

Tax Monitoring And Tax Status Research Fees

These fees are charged by lenders to monitor your property tax payments and to verify the status of your property taxes. The cost of these fees varies by lender.

Title Search Fees

Title search fees are paid to the title company for doing a detailed search of the property’s records. This fee can range from $200 to $400.

Transfer Tax

Transfer tax is a government fee charged to transfer the title from the seller to the buyer. The cost varies by state and can range from a small flat fee to a percentage of the property’s sale price.

VA Funding Fee

When purchasing a home with a VA loan, you may encounter the VA funding fee. This fee covers administrative costs associated with the VA loan program and is a crucial aspect to consider during the home buying process. The funding fee amount depends on factors such as your down payment, whether it’s a purchase or refinance, and if you’re a first-time VA benefit user.

For first-time VA users who put down less than 5% on their loan, the funding fee is 2.15% of the total loan value. A 5% down payment reduces the fee to 1.5%, while a 10% down payment lowers it to 1.25%. These percentages apply regardless of whether it’s your first or tenth time using your VA benefits.

When refinancing from another loan type to a VA loan, the funding fee is 2.15% for first-time users and 3.3% for subsequent users. For VA Streamlines, also known as Interest Rate Reduction Refinance Loans (IRRRLs), the funding fee is 0.5%.

Strategies for Minimizing Closing Costs

Closing costs can add up quickly, but there are several ways to reduce these expenses when buying a home. By employing these strategies, you can save money and make your home purchase more affordable:

Shop Around for Lenders

Different lenders offer varying fees and interest rates, so it’s essential to shop around and compare loan offers. Obtain multiple quotes from various lenders to find the best deal with the lowest closing costs.

Negotiate with the Seller

In some cases, you can negotiate with the seller to have them cover part or all of your closing costs. This tactic, known as a seller concession, may be more feasible in a buyer’s market, where sellers are more eager to make a deal.

Look for Discount Points

Discount points are fees you pay upfront to lower your mortgage interest rate. While they can save you money over the life of the loan, they also increase your closing costs. Carefully consider whether purchasing discount points is worth it for your specific situation.

Request a No-Closing-Cost Loan

Some lenders offer no-closing-cost loans, which essentially roll the closing costs into your mortgage. While this means you won’t pay any closing costs upfront, you’ll likely have a higher interest rate and a larger loan balance.

Apply for Closing Cost Assistance Programs

First-time homebuyers and those with lower incomes may be eligible for closing cost assistance programs. These programs, offered by state and local governments or nonprofit organizations, can provide grants or low-interest loans to help cover closing costs.

Time Your Closing Wisely

Closing at the end of the month can save you money on prepaid interest charges. Since interest accrues daily, you’ll pay less in prepaid interest if you close later in the month.

Understanding Realtor’s Commission at Closing

When it comes to closing on a property, one common question is, “Who pays the realtor’s commission?” Generally, the seller is responsible for paying the commission fees for both the buyer’s and the seller’s real estate agents. The commission, which is typically around 5% to 6% of the home’s sale price, is then split between the two agents.

Exploring No-Closing-Cost Mortgages

A no-closing-cost mortgage might sound like a dream come true, but it’s essential to understand what it entails. In this type of mortgage, the lender covers the closing costs; however, this comes at a price. To compensate, the lender usually increases the interest rate or adds the closing costs to the total loan amount. While this option can be helpful for those who struggle to cover closing costs upfront, it may result in higher monthly payments and a larger overall loan balance.

Robbi Cahya Yudha

As an experienced professional in the mortgage loan and property market, Help individuals and families achieve their homeownership dreams.  My mission is to simplify your real estate journey and secure the best possible outcomes in this ever-changing market.