What are Closing Costs? How Much Will You Pay?
Understand the hidden closing costs of buying a home, from lender fees to property taxes, and learn strategies to budget effectively and reduce these expenses.
Photo by DESIGNECOLOGIST
Imagine preparing to buy your dream home, only to discover unexpected expenses lurking beyond your down payment. These hidden fees, known as closing costs, can catch first-time home buyers off guard. Understanding closing costs is crucial to avoid surprises and to budget effectively for your new home.
What Exactly Are Closing Costs?
Closing costs are the fees and expenses you pay when finalizing your mortgage. They cover a range of services required to complete the home-buying process, such as appraisals, attorney fees, and escrow charges. The specific costs can vary depending on your loan type and where you live.
How Much Should You Expect to Pay?
Typically, closing costs amount to 3% – 6% of your loan amount. For a $200,000 mortgage, this means you might pay between $6,000 and $12,000 in closing costs. It's important to note that these costs are separate from your down payment.
Average Closing Costs by State
Closing costs can vary significantly from one state to another. Here's a snapshot of average closing costs, both including and excluding transfer taxes:
| State | Including Transfer Taxes | Excluding Transfer Taxes |
|---|---|---|
| Alabama | $2,986 | $2,623 |
| California | $7,953 | $5,665 |
| Florida | $8,554 | $4,498 |
| New York | $16,849 | $6,168 |
| Texas | $4,548 | $4,548 |
Note: These figures are based on average home prices and can vary.
Who Foots the Bill for Closing Costs?
Both buyers and sellers share the burden of closing costs, but buyers typically pay the majority. However, in some cases, you can negotiate with the seller to cover a portion of these costs, known as seller concessions. The amount a seller can contribute varies based on the loan type, down payment, and whether the property is a primary residence or investment property.
Seller Concession Limits by Loan Type
- Conventional Loans:
- Primary Residence:
- Down payment less than 10%: up to 3% seller concessions.
- Down payment 10% – 24.99%: up to 6%.
- Down payment 25% or more: up to 9%.
- Investment Property: Maximum of 2% regardless of down payment.
- Primary Residence:
- FHA Loans: Up to 6% of the lesser of the purchase price or appraised value.
- VA Loans: Up to 4% for specific costs, with some exceptions.
Example: On a $200,000 conventional loan with a 5% down payment, the seller can contribute up to $6,000 (3%) toward closing costs.
Breaking Down Common Closing Costs
Closing costs encompass a variety of fees. Here's what you might encounter:
Lender and Mortgage-Related Fees
- Loan Origination Fee: About 1% of the loan amount for processing your loan.
- Application Fee: Up to $500 for processing your mortgage request.
- Credit Reporting Fee: $10 – $100 for pulling your credit report.
- Discount Points: Optional fees to lower your interest rate; 1 point equals 1% of the loan amount.
- Rate Lock Fee: Charges to lock in your interest rate; sometimes offered for free.
Property-Related Expenses
- Appraisal Fee: $300 – $600 for assessing your home's value.
- Home Inspection: Around $300 to ensure the property is in good condition.
- Pest Inspection Fee: Approximately $100; may be required in some states.
- Survey Fee: $400 – $1,000 to verify property boundaries.
Insurance and Taxes
- Homeowners Insurance: Typically, one year's premium paid upfront.
- Private Mortgage Insurance (PMI): Required if your down payment is less than 20% on a conventional loan.
- FHA Mortgage Insurance Premium (MIP): Upfront fee of 1.75% for FHA loans.
- Property Taxes: May need to prepay several months' worth into escrow.
- Title Insurance:
- Lender's Title Insurance: Protects the lender; usually 0.5% – 1% of the loan amount.
- Owner's Title Insurance: Optional but recommended for buyer protection.
Legal and Administrative Fees
- Attorney Fees: Varies by state; covers legal paperwork and closing.
- Closing Fee: Paid to the escrow company or attorney conducting the closing.
- Recording Fee: Around $125 to update public land records.
- Transfer Tax: Varies by location for transferring property ownership.
Miscellaneous Costs
- Escrow Funds: Prepaid amounts for future taxes and insurance.
- Courier Fee: Approximately $30 for transporting documents.
- Flood Certification: $15 – $25 to determine flood risk.
- Tax Monitoring and Research Fees: Ensure property taxes are current.
Calculating Your Closing Costs
To estimate your closing costs:
- Use the 3% – 6% Rule: Multiply your loan amount by 0.03 and 0.06.
- Review Your Loan Estimate: Provided by your lender, it itemizes expected costs.
- Consider State Averages: Research typical costs in your area.
Tip: Always review the Closing Disclosure your lender provides at least three business days before closing to see exact costs.
Strategies to Reduce Closing Costs
- Shop Around for Lenders: Different lenders have varying fees. Compare at least three.
- Negotiate with the Seller: In a buyer's market, sellers may agree to cover some costs.
- Close at Month-End: Reduces prepaid interest charges.
- Review the Loan Estimate Carefully: Question any unfamiliar or unexpected fees.
The Bottom Line
Closing costs are an essential part of the home-buying equation, covering various fees necessary to finalize your mortgage. Being informed about these costs helps you budget accurately and avoid surprises on closing day. By understanding what's involved and exploring ways to reduce these expenses, you can make your journey to homeownership smoother and more affordable.
Remember, every real estate transaction is unique. Consult with a trusted real estate professional right for your situation.
Quick facts
What is the formula for calculating closing costs?
Closing costs are typically calculated as 2-5% of the home purchase price. For example, a $300,000 home may have closing costs of $6,000 to $15,000.
How do you calculate closing?
To calculate closing costs, add up fees like loan origination, appraisal, title insurance, escrow fees, and property taxes. Typically, these costs range from 2% to 5% of the home’s purchase price.
What are the biggest closing costs usually paid by buyers?
The biggest closing costs for buyers include loan origination fees, appraisal fees, title insurance, and escrow fees. Prepaid taxes and insurance can also add to the total.
What closing costs do sellers pay in Texas?
In Texas, sellers typically pay for title insurance, real estate agent commissions, and a portion of escrow fees. Local taxes or fees may also apply.
Why is closing on a house so expensive?
Closing on a house is expensive due to fees for appraisals, inspections, title insurance, taxes, and lender-related costs. These expenses add up to 2-5% of the home's purchase price.
Can you negotiate closing costs?
Yes, closing costs can often be negotiated. Buyers can ask sellers to cover certain fees or shop around for more affordable service providers.
How is closing price calculated?
The closing price includes the agreed home purchase price, minus any negotiated credits, plus additional costs like taxes, fees, and insurance due at closing.
When are closing costs paid?
Closing costs are typically paid at the closing meeting, which is when the property title is transferred, and all financial transactions are finalized.
Can closing costs be rolled into the mortgage?
Yes, some lenders allow closing costs to be rolled into the mortgage, increasing the loan amount but reducing upfront expenses.
Are closing costs tax-deductible?
Certain closing costs, like mortgage interest and property taxes, may be tax-deductible. Consult a tax professional for specific guidance.
How long does closing take?
Closing typically takes 30-60 days from the time an offer is accepted, depending on the complexity of the transaction and lender requirements.
Meron Ogbai
Software Engineer at Spoken
Meron is a Software Engineer at Spoken. Prior to joining Spoken, he worked at an online gaming company and an AI startup. Meron loves building things to make people's lives easier. When he's not coding, he's probably hunting for the best coffee spots or getting lost in a good book.
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