Closing Costs: What To Expect
Scott Steinberg7-Minute Read
March 24, 2022
What are closing costs on a house? How much are closing costs for a buyer or seller? What’s included in closing costs at the time of sale for a property − and who’s ultimately responsible for paying these added expenses?
Closing costs are fees paid at the closing of a real estate transaction (aka the time of sale and formal transfer of ownership). It’s important to understand what’s included in them and how much you can expect to pay in associated billings. Let’s take a closer look at how closing costs work − and how much that you’ll want to budget for them.
What Are Closing Costs?
When buying a house, the single biggest out-of-pocket expense that you’ll face is typically making a down payment on the property − rendering it the first thing that often springs to mind when thinking about a real estate transaction. However, it’s also important to plan for closing costs, which are expenses that must be paid at closing.
What’s more, closing costs are often considered separately from your down payments and can be negotiated between buyers and sellers. Keeping this in mind, it’s important to be aware of what’s included in closing costs, who’s expected to pay for them, and how much you may have to save up to meet your obligations here. And note, closing costs will also likely be applied again if ever you should choose to refinance your mortgage.
Types Of Closing Costs You’ll Pay On A House
There are many different types of billings and expenses covered by closing costs.
Property-Related Closing Costs
- Appraisal fee: Lenders will require a home appraisal as part of the mortgage process to ensure that they’re not extending you a mortgage for significantly more than a property is expected to be worth. The associated fee is typically paid by the buyer.
- Home inspection: A home inspection fee is also part of most closing costs, as buyers and lenders will typically wish to see that a property is in good and livable condition, and free of substantial and material defects, before extending you a home mortgage.
- Escrow fees: Escrow fees are a requirement of many mortgages to make sure that funding is set up in advance so your taxes and homeowners insurance are properly paid when due.
- Property taxes: All homeowners are expected to pay property taxes to the government, and mortgage lenders will ask you to set aside funding to cover these expenses (or even pay additional funds later if there’s a shortfall) as you embark on homeownership.
Mortgage-Related Closing Costs
- Origination fee: Loan origination fees essentially serve as a payout to originating lenders, who do not see most of the monies from interest payments that you make.
- Processing and underwriting fees: Underwriting fees are part of most closing costs as they help cover the time and expense associated with a lender’s management of the paperwork, scheduling, and loan eligibility qualifications process associated with extending a home mortgage.
- Title insurance and search: Title searches must be performed as part of obtaining a mortgage in order to help ensure lenders that no other party besides the seller has a claim to the property being sold. Along similar lines, title insurance helps insure your lender against future claims that may arise to ownership of the property that is trading hands.
- Mortgage insurance: Mortgage insurance is part of most closing costs as it helps insure mortgage lenders against buyers defaulting on loan payments. It’s often possible to get rid of mortgage insurance though by making a larger down payment (20% minimum), or by working with zero or low money down loan or assistance programs to obtain loans on government-backed terms.
- Credit report fee: A credit report fee is applied as lenders will wish to check your credit score and credit history to determine if you’re creditworthy enough for a loan. Lenders need your credit report to get a sense of how responsible you are with managing money, and any risks that they may be choosing to undertake in lending to you.
- Courier fee: Courier fees cover the costs of any documentation that needs to trade hands between parties such as your loan estimates and closing disclosure.
- Application fee: Mortgage application fees are also applied to help cover the costs of lenders processing your home loan application.
Additional Closing Fees
- Attorney or notary fee: Monies charged for the services of real estate attorneys and notaries, whose contributions are necessary to ensure the lawful and legally authorized sale of a piece of property.
- Flood certification: Flood certification is necessary for properties that are located in geographic areas that are prone to periodic flooding − in addition, flood insurance may be required for your home.
- Homeowners association fees: Homeowners association (HOA) fees go to cover expenses charged by the HOA which governs your property to help with building and/or grounds management and upkeep. If the property isn’t within an HOA, then you won’t need to worry about this.
- Discount points: Mortgage discount points (aka prepaid interest points) are an optional purchase which you can elect to buy as a way to lower your mortgage interest rate. One discount point is effectively equal to 1% of your loan amount, and discount points can be purchased in increments of as little as 0.125%. Before purchasing them, be sure to crunch the numbers and do some budgeting to determine how much that you stand to save by buying discount points vs. how long you plan to stay in your home.
FHA, VA or USDA fees: Federal Housing Administration loans (FHA loans), Department of Veterans Affairs loans (VA loans) and U.S. Department of Agriculture loans (USDA loans) may also come with additional fees due at closing as well.
How Much Are Closing Costs?
Closing costs will vary by lender, title company, and individual transaction, but typically amount to roughly 3% − 6% of your loan amount or purchase price. However, closing costs generally tend to be lower on a mortgage refinance because added appraisal and title work may not be necessary. Initial loan estimates will generally give you a good idea of where your closing costs will land − but you’ll receive a closing disclosure three business days before closing on your mortgage that runs down the final amount of closing costs.
Who Pays Closing Costs?
Wondering who’s responsibility it is to pay closing costs and when? For brevity’s sake, closing costs are generally negotiable, outside of a down payment, which the buyer is responsible for. Negotiations between buyers and sellers typically result in different readouts of who pays closing costs.
Note though that while seller concessions (additional payments that are negotiated from sellers) present one way to keep closing costs down, lenders and mortgage investors place limits on how much sellers can pay for. That said, sellers are commonly responsible for paying commissions to any real estate agents involved in the transaction.
Closing Costs For A Buyer
- Mortgage down payments
- Home appraisals and inspections
- Title searches and insurance
- Application and origination fees
- Processing and underwriting fees
- Credit reports
- Notary and attorney fees
- Property taxes and homeowners insurance
- Flood insurance
- Mortgage discount points
Closing Costs For A Seller
- Real estate agent commissions
- Others as may be covered under local customs
Ways To Lower Your Closing Costs
Of course, there are ways for savvy buyers to lower potential closing costs for themselves as well. Generally, you have two options for reducing closing costs here: Seller concessions and lender credits.
- Seller concessions: Seller concessions are extended when a seller agrees to cover part of the closing costs for a prospective buyer. Negotiating for concessions works best if you’re dealing with a motivated seller or the property has been on the market for an extended period of time. But remember, all loan options place limits on how much the seller can contribute to closing cost expenses. For example, the limit is 3% of the total loan amount when purchasing a primary residence with a conventional loan and a down payment of less than 10%.
Lender credits: Another way to lower closing costs is to convince your lender to cover some or all of these expenses (though they won’t spot you on the down payment) in exchange for accepting a higher interest rate. Doing so operates in reverse of discount points − and by accepting a higher interest rate, your closing costs are effectively paid for over the lifetime term of the loan instead of covered up-front at closing.
FAQs About Closing Costs
Naturally, home buyers and sellers will have many frequently asked questions (FAQs) about closing costs. Answers to several of the most common queries can be below.
Can closing costs change?
Yes − from start to finish, third-party fees for appraisals, title insurance, and other line items can change by as much as 10%. However, certain lending costs such as loan origination, processing and underwriting fees are very limited in how much they can shift.
How can I avoid closing costs?
As we mentioned above, while you can’t avoid them entirely, you can lower your closing costs by negotiating for seller concessions or bargaining with your mortgage lender to receive lender credits.
Can I roll closing costs into my mortgage?
Yes, depending on loan type, lender terms, and your individual financial situation. Individual mortgages and loan providers may allow you to roll your closing costs into your overall home loan. If you have questions about your ability to do so, be sure to speak with your preferred loan provider.
The Bottom Line
Closing costs are expenses that must be paid when you close on a property, whether as a prospective home buyer or home seller. These closing costs cover a variety of expenses from title searches and insurance to loan origination and underwriting fees charged by your lender.
While you can certainly lower your closing costs by applying for certain preferred loan types, or negotiating for seller’s concessions and lender credits, be sure to factor the added expense of them in when budgeting for a home purchase.
Determining how much house that you can afford is about more than deciding how much of a down payment you’ll be able to save up after all − and doing a little research budgeting up-front can help you stay far more liquid and cash-positive on the back end.
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