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Closing Costs: Mortgage Closing Costs, Explained

Disclaimer: Beginning January 1, 2020, the VA funding fee will be changing to a range of 1.4% – 3.6% based on factors like your down payment or equity amount, your service status and whether this is a first or subsequent use of a VA loan.

When it comes to saving money to buy a home, you’ve probably been pretty focused on the down payment. But you’ll also need to plan for closing costs, which are due when your loan closes.

Understanding what closing costs are, how much they’ll cost on average and what’s included can help eliminate any unexpected financial obstacles when you close on your new home.

What Are Closing Costs?

Closing costs are fees paid to cover the costs required to finalize your mortgage when you’re buying or refinancing a home. Closing costs are paid at closing, the point in time when the title of the property is transferred to the buyer.

Most of the closing costs are paid by the buyer, but the seller typically will have a few to pay too, such as the real estate agent’s commission.

Lenders are required by law to provide a Loan Estimate within 3 days of receiving your application. The estimate provides a detailed list of what you can expect in closing costs.

How Much Are Closing Costs?

How much you’ll pay varies according to the amount of your loan and tax laws in your area.

Typically, closing costs average between 3% to 6% of the purchase price. So, if you’re buying a $300,000 house, you might pay between $9,000 and $18,000 in closing costs.

On average, buyers pay an estimated $3,700 in closing costs.

Most buyers pay closing costs as a one-time, out-of-pocket expense when closing their loan.

If you need help with closing costs, check with state or local housing agencies to find out what may be available. Many offer low-interest loan programs or grants for first-time buyers.

You’ll pay higher closing costs if you choose to buy discount points, but the trade-off is a lower interest rate on your loan

Calculating Closing Costs

Buyers can usually expect to pay about 5% of their purchase price in closing costs.

So, if you’re buying a home listed for $200,000, you can expect to pay $10,000 in closing costs.

To get a better idea of how much you might pay in closing costs, try using an online calculator, such as this one from SmartAsset.

What Do Closing Costs Include?

The closing costs you’ll pay will vary depending on where you’re buying your home, the home itself and the type of loan you pursue.

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Closing costs may include appraisal fees, loan origination fees, discount points, title searches, credit report charges and more.

Property-Related Costs

  • Appraisal: This will be mandated by the lender to make sure the home is worth the sales price. Most appraisers charge $300 to $500 for their services.
  • Escrow fees: You may have to pay portions of property taxes and insurance upfront into an escrow account.
  • Flood certification: If your house is situated on or near a flood plain, your lender may require documentation confirming its status, which involves paying around $15 to $20 for a certification from the Federal Emergency Management Agency (FEMA).
  • Home inspection: Depending on the square footage and type of inspection, the buyer pays $500 to $1,000 for a home inspection to look for signs of damage and defects. This is nonrefundable money, and there’s no guarantee the seller will make repairs or renegotiate the sales price based on results of the inspection.
  • Property taxes: At closing, the buyer typically pays the city and county property taxes due from the date of closing through the end of the tax year.
  • Annual assessments: If you’re buying in a development with a homeowners association (HOA) that requires an annual fee, it may be due upfront at closing.

Loan-Related Costs

  • Title/attorney fees: This includes necessary government filing fees, escrow fees, notary fees and other expenses related to transferring the deed. The cost of title and attorney fees varies significantly from state to state.
  • Loan interest: You’ll need to pay interest on the loan prorated from the closing date to the first of the following month.
  • Lender fees: These cover items ranging from administrative costs to pulling your credit report to wire transfer fees. If a lender boasts unusually low rates, it’s possible they’ll try to make up the difference with additional lender fees, so be sure to compare apples to apples. Check out this video for an understanding of the difference between base mortgage rates and APR.
  • Application fee: This is charged by the lender and varies in price, up to $500. The application fee is nonrefundable, even if you aren’t approved for the loan.
  • Assumption fee: If you’re assuming a conventional loan from the seller, you’ll pay an assumption fee set by the lender, typically $800 to $1,000, or in some cases 1% of the loan amount. For FHA loans, the maximum allowed is $500, and for VA loans, the max is $300.
  • Prepaid interest: This is daily interest that accrues on the loan between the closing date and first monthly mortgage payment.
  • Loan origination fee: These are the fees paid to the lender to obtain a mortgage and are expressed as a percentage of the loan amount. If the loan amount is $100,000 and you see a $1,000 loan origination fee on the paperwork, the lender is charging one mortgage point.
  • Discount points: Discount points are fees paid directly to the lender by the buyer at closing in exchange for a reduced interest rate. This is also called “buying down the rate.” One point costs 1% of your mortgage amount (or $1,000 for every $100,000).
  • Title search fee: Paid to the title search company that researched the property’s history to make sure the title (ownership) will be “clear.” Typically this runs $75 to $100.
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Other Insurance-Related Costs

  • Mortgage insurance application fee: If your down payment is less than 20%, the lender will require private mortgage insurance (PMI). This fee varies by lender.
  • Upfront mortgage insurance: PMI can be rolled into your monthly payments, but it can also be paid at closing. Paying upfront usually saves money.
  • FHA, VA and USDA fees: Fees on FHA, VA, and USDA loans differ from those charged on conventional loans. FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% and a monthly fee. VA home loans require an upfront, one-time VA funding fee, determined by the loan amount, the buyer’s service history and other factors. VA home loan applicants can pay all or part of the fee in cash or roll it into the loan amount to reduce out-of-pocket expenses. USDA loans include an upfront guarantee fee of 1% and an annual fee of 0.35%.
  • Lender and owner title insurance: Lender policies protect the mortgage lender’s interest. Buyer policies protect the buyer’s interest. The average title insurance policy carries a one-time premium of about $1,000, paid by the buyer.

Closing Costs for the Buyer vs. Seller

The buyer typically pays the majority of closing costs. Of course, there’s always room to negotiate – but choose your battles wisely. A seller will likely be much more open to negotiation when presented with an offer of the full asking price or when it’s a buyer’s market.

Another option for these costs is to meet the seller halfway, dividing expenses between both parties.

Seller concessions are part of your closing costs that, instead of paying yourself, you negotiate to have the seller pay. Buyers might ask for concessions if they think they’ll have trouble covering their closing costs or if a home inspector finds issues that are going to cost money to fix.

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It’s worth noting that concessions can help out the seller as well. If they are selling their home in a crowded market and aren’t having much luck, offering concessions can make the deal seem more attractive to potential buyers.

Are Closing Costs Negotiable?

The Loan Estimate will help you understand what closing costs to expect and which you may be able to lower. You should ask the lender about fees you may not understand or think could be lowered.

Lenders will schedule an independent appraisal by a qualified appraiser not affiliated with the lender or anyone else who’s part of the mortgage transaction.

There’s typically a set cost associated with appraisals based on the loan type and the area you’re in. However, other items like title insurance, pest inspection and the settlement agent may be open to negotiation. Of these fees, you’ll save the most on title insurance and settlement (which are sometimes combined). But if you’re planning to comparison shop for title and settlement, do so quickly because these services take time.

Also, watch for miscellaneous fees like funding and delivery fees. If the fees seem vague, you may be able to push back to have them lowered or eliminated.

Closing Your Loan

Your escrow officer, title company or real estate agent will let you know when your loan is scheduled to close.

Three days prior to the closing, you should receive your closing disclosure, which provides final details about your loan and closing costs. Compare these costs carefully to your Loan Estimate and make sure any changes you’ve agreed to with the seller are reflected in the final document.

On your closing day, you’ll need your state-issued photo ID and a certified or cashier’s check for the amount you owe. After you’ve signed all the documents and paid, your loan will be closed, and you’ll walk away with the keys to your new home!

Questions? Contact a Home Loan Expert today or give us a call at (800) 785-4788. You can also feel free to leave us a note in the comments below.

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