July 26, 2023
Here we offer everything you need to know about closing costs so that you can feel confident throughout your purchase process.
Closing Costs: What Are They and How Much Will I Have to Pay?
Everyone tells you not to forget them, but it’s sometimes hard to nail down the details. Here we offer everything you need to know about closing costs so that you can feel confident throughout your purchase process.
When you are researching the homebuying process, you’ll probably see a lot of information about earnest money deposits and down payments. Somewhere in there, you’ll also probably see a reminder not to forget about closing costs. This is often left rather vague since closing costs can vary based on many different factors, including property tax rates, community-related fees, and the specifics of your financing. So what are closing costs for the buyer side of the transaction? How much are closing costs? Who pays closing costs when you purchase a home?
Closing costs are an amalgam of charges required to finalize, or close, the home purchase transaction. After all, it takes a lot of people, processes and professional services to put together a home purchase, and these are, for the most part, paid for from the closing costs.
Closing costs for buyers are often more expensive than for sellers because many closing costs are associated with the mortgage and the due diligence process. In addition, buyers need to bring down payment funds to the table, so there is more financial responsibility on the buyer’s side.
Due diligence is the process of checking out the home you’re hoping to buy in order to ensure that it is in suitable condition. The requirements for property condition can vary according to some mortgage products, so check with your lender regarding the specifics of your loan, especially if you’re purchasing a fixer-upper or older home.
Home inspection: While the home inspection is often paid for upfront at the time of inspection, it is sometimes wrapped into the other costs associated with the transaction and paid as part of the closing costs.
Optional inspections: There are many different inspections that may be required depending on the home’s specific features. For older homes, you may need to perform a lead paint inspection. For a home with a pool or with extensive outdoor features, you may want to bring in specialized inspectors for those systems. If you identify problems with the foundation, roof, or chimney, you may need to bring in a specialty inspector to get a better understanding of the need for repairs.
Appraisal: While the appraisal is generally ordered by the mortgage lender, it is included under due diligence because it’s part of the way that the lender determines the home’s condition, features, and value. This provides reassurance to the lender that the home is worth the amount they’re lending you.
Application fee: The application fee covers the processing of your loan application, including administrative costs, credit check, research costs, and more. The application fee is set by the lender and is highly variable.
Attorney’s fee: Many states require an attorney to conduct the closing for your home purchase. In some cases, the closing occurs in the attorney’s office, while in other states an attorney is required to prepare the documents and supervise the process, even if it occurs at a closing and title company or remotely. Attorney fees are highly variable. In addition, if the parties are closing separately or if a power of attorney needs to be prepared for an absentee closing, there will be additional fees.
Prepaid interest: Some time will pass between the closing of your home purchase and your first payment to the lender. In this case, the lender will require you to pay an interest payment upfront to cover the cost of financing the home during this time period.
Origination fee: The loan origination fee covers the lender’s cost of underwriting the loan itself, including notary charges and other charges associated with the process of researching your financial readiness and approving the loan.
Discount points: In order to obtain a lower interest rate, you may choose to purchase discount points. This may be especially important during times when interest rates are high. One discount point is equal to one percent of the total loan amount. Talk to your lender about whether discount points make sense in your specific situation.
Mortgage insurance application fee: If you are putting down less than 20 percent, you will need to purchase private mortgage insurance to cover the lender’s risk. The application fee varies according to the insurance provider.
Upfront mortgage insurance: Depending on the lender, you may need to pay your mortgage insurance premium in full upfront, while others will require only the first year’s premium. That can make this a highly variable cost.
FHA, VA and USDA fees: If you are financing your home through the Federal Housing Administration, you’ll need to pay FHA mortgage insurance premiums. With a Veterans Administration or United States Department of Agriculture loan, you’ll need to pay guarantee fees.
Assumption fee: Some mortgage products, called assumable mortgages, allow you to take on the owner’s existing financing and complete the purchase under the terms of their mortgage. You will generally pay a fee based on a percentage of the remaining balance of the loan.
Mortgage broker fee: If you work with a mortgage broker to find your lender, you may pay a highly variable fee from 0.5 percent to 2.75 percent of the purchase price as a commission for this service.
Title refers to the ownership documentation on file with your local or county government.
Title search fee: There are many things that can happen in the history of a piece of property to call title into question. Liens from previous creditors, questions about inheritance, prior formal and informal land use agreements – all of these can create what are called “clouds on the title” or discrepancies in the history of the property’s legal record. A title search is a thorough investigation into the history of the property to ensure that the buyer is not confronted with questions regarding their legal ownership in the years ahead.
Lender’s title insurance: Because the lender is putting up the money to finance the property, they want additional protection in case there is an error in the title search or in case they have to defend the title from an ownership claim. Lender’s title insurance remains in effect until the loan is paid off, which varies depending on your particular mortgage terms.
Owner’s title insurance: Similarly, you may want to purchase title insurance to protect yourself from subsequent claims to the property. Optional owner’s title insurance protects your rights to the property as well as that of your heirs for as long as it remains under your ownership or inheritance gift.
This category covers costs that can vary by the property’s location, size, condition, and other factors.
Property taxes: Buyers generally pay a prorated portion of annual property taxes for their city or county tax authority.
Condominium or Homeowners Association fees: Buyers may pay a prorated portion of the annual fee, pay the next year’s fee upfront, or pay a transfer fee, depending on the policy of the individual association.
Homeowners Insurance: Buyers are required to obtain homeowners insurance before closing and an upfront premium cost is included as part of the closing costs.
As you can tell from the list, many fees, especially those associated with the home loan, are highly variable. They may vary based on your location, since some markets are more expensive than others. They may vary based on the price of your home, since many of the costs are based on a percentage of the purchase price.
Closing costs can range from two percent to six percent of the home’s purchase price. Because they vary so widely, lenders are required to provide both a Loan Estimate at the beginning of your purchase process and a Closing Disclosure statement prior to closing. That way you should be able to ask questions and plan for specific costs associated with your transaction.
Both the buyer and seller have closing costs associated with the home purchase. These include their portion of prorated taxes and fees as well as the commission due to the real estate agents involved in the transaction.
Depending on the market, you may be able to ask the seller to pay a portion of your closing costs. This is especially likely during a strong buyers market, when there is a lot of home inventory on the market and sellers are eager to facilitate a timely closing for their sale.
In some cases you may be able to negotiate certain fees due at closing, including administrative fees associated with your home loan. You may also be able to qualify for closing cost grants and credits in some markets.
Prorated closing costs can vary significantly based on the day of the month or the time of year, so this may offer you some flexibility. In addition, there are some closing costs that can be rolled into your home loan and paid over the life of the loan term. Talk to your mortgage lender and find out how you can minimize the upfront costs associated with closing on your home purchase.
