When saving for a house, it’s easy to fixate on securing your down payment. But that isn’t the only thing you should be concerned with. Closing costs are the collection of fees that you pay to finalize the sale and transfer the property from seller to you, the buyer. Closing costs can catch you off guard if you aren’t aware of what they are and how much you should expect to pay. These costs are not included in the listing price of the house and will depend on your loan amount and the particular tax laws of your state. Generally, you should anticipate closing costs to total anywhere from 2% to 5% of the purchase price.
That’s a considerable range. Thankfully, what you will pay for closing costs should not be a surprise. Your mortgage lender will provide you with a loan estimate that discloses what you will pay and how it all breaks down. A loan estimate is a government-mandated form, meaning it looks the same across all lenders, which makes it easy to shop around for the best option for you.
One of the first fees associated with closing costs is the application fee. This fee is charged by the lender and covers the costs of processing your loan application, which includes the cost of your background check and any other administrative costs the lender defines. A non-refundable fee, your application will vary by lender and must be paid regardless if you are approved for the loan or not.
Also known as the underwriting fee, the origination fee is charged by the lender for creating and processing your mortgage. What the lender includes in this fee may vary, though generally, it includes things like their attorney fees, notary fees, and document preparation costs. This fee is typically a little higher for those with lower credit scores, though it’s safe to expect about 0.5% to 1% of what you’re borrowing.
Discount points are upfront payments designed to reduce your interest rate and monthly payments over the entirety of your loan. They are optional and generally used if you plan to stay in your home for a long time. The longer you pay on a loan, the more a decrease in your interest rate will save you money. Calculating points is easy; one discount point is equivalent to 1% of your total loan or $1,000 for every $100,000.
Title-related fees will comprise the majority of your closing costs. While there are various smaller attorney fees related to the title of your home, there are three main fees that you will encounter.
- Title search: A title search is a fee you pay to a title search company to research the history of ownership on the property you want to buy. They will search public records for any discrepancies, outstanding claims, or liens on the home, which could mean that the person selling the property doesn’t technically own it.
- Lender’s title insurance: This is a one-time fee that’s paid to the title company to protect the lender from anything that didn’t show up on the original title search.
- Owner’s title insurance: Owner’s title insurance is optional, but highly recommended. This type of insurance protects you if someone attempts to challenge your ownership of the property.
Attorney fees will depend on where you live and how many billable hours your attorney charges. The fees include things like the attorney coordinating your closing, reviewing documents and agreements, and the time it took them to create any necessary paperwork. The fees will vary and some states do require an attorney to be present at the close of your housing loan, so you won’t be able to avoid them.
Prepaid daily interest
The prepaid daily interest fee accounts for the prorated interest that accrues on your loan from the settlement date to the start of the first month of your mortgage. Lenders may ask you to pay it upfront, so be prepared to pay for this at closing. The exact amount of interest that accrues and the fee you will have to pay is dependent on your loan and interest rate.
Escrow property taxes and insurance fees
Required by lenders, a deposit of some amount must be placed in an escrow account that would be used to cover any missed property tax or insurance fees down the line. How much you put into your escrow account will vary by lender and are common if you put down less than 20% as your down payment. In the case of property taxes, the government has the first claim on the house if you fall behind on payments, not the lender. An escrow account avoids any missed property tax payments by allowing the lender to ensure pay with the money that was deposited. How much you are required to put into an escrow account will be outlined in the loan estimate you receive from your lender.
Appraisal happens before the deal is finalized; the lender hires an appraiser to make sure the home is worth the sales price. This person will determine the condition of the house, size of the property, and any comparable properties in the area. The appraisal fee is paid to the company that assesses the property and confirms the value of your home.
A non-refundable fee, the home inspection fee pays a professional to come to the home to check for damage, pests, and any other existing issues you may not know about. The cost will depend on the size of your home and can become costly, though it’s a crucial way to ensure the property is safe and in the condition that’s expected.
Survey and flood certification
The survey fee is paid to the company that evaluates the boundaries of your property, gas line locations, and any shared fences on the property. A surveying fee is not required for every state. A flood certification from the Federal Emergency Management Agency (FEMA) confirms that your property is located in a flood plain and is not required for every home.
How much you will pay in property taxes depends on where you live and how much your home is worth. These taxes go to public services like schools, fire departments, and roads. Your lender may require that you pay up to a year in property taxes at close or the taxes remaining for the rest of the year from the closing date. Generally, property taxes at closing are due within 60 days of purchase.
Annual Fees and Insurance-Based Costs
A necessity for everyone, homeowners insurance reimburses you if your home is damaged or vandalized. It’s also another closing cost fee your lender will require. Not only will most require you have some sort of homeowners insurance policy before closing, but they may even require up to a year’s worth of payments at closing. The money paid would go into your escrow account.
Private mortgage insurance
Private mortgage insurance (PMI) protects the lender if you default on your loan. PMI is required by lenders if you put less than 20% down. Additionally, your lender may require that you pay your first month of PMI at closing, though the exact amount you’ll be asked to pay depends on your lender.
FHA, VA, USDA Fees
If your loan is through the Federal Housing Administration (FHA), Veterans Affairs (VA), or the U.S. Department of Agriculture (USDA), you will have fees due associated with each. These fees differ from conventional loans and vary by type.
- FHA: A mortgage insurance premium (MIP) of 1.75% of your loan and monthly fees are required at closing with an FHA loan.
- VA: If your loan is through the VA, you will pay an up-front, one-time funding fee that is determined by the loan amount and your service history, among other factors your lender may consider. It can range from 1.25% to 3.3%, depending on your down payment. You can choose to pay this fee out of pocket or roll it into your mortgage.
- USDA: You pay an upfront fee of 1% of your loan in addition to an annual fee of 0.35%.
Tips to Reduce Closing Costs
Your loan estimate will tell you what loans to expect and which you can potentially lower. Though you won’t be able to lower or avoid them all.
- Shop around and compare costs: Never be afraid to take the time to shop around for lenders. Call around to other options and see what fees they charge. This will allow you to find a lender with low rates and competitive interest rates. Shopping around for the best options may even lead to certain lenders matching lower options.
- Look for duplicate or unnecessary fees: When you receive your loan estimate, it’s essential to go through it thoroughly and check for any duplicate charges or unnecessary fees. Your lender may list duplicate charges under different names even though they are the same thing.
- Negotiate with seller: Seller concessions are the fees the seller agrees to pay at closing, reducing the costs the buyer has to pay out of pocket. They are not required and it’s up to the seller if they agree to grant any to the buyer. Your agent will negotiate any seller concessions with the seller’s agent and determine the sales price of the home that will include the amount of seller concessions. Seller concessions are not free money; they are designed to save the buyer money at closing, though those funds are added to the property’s sales price.
Three business days before closing on your mortgage, your lender is obligated to give you a closing disclosure that functions as the final terms of your closing costs. It’s good practice to compare your closing disclosure to your loan estimate and see what changes were made. And always take time to ask your lender any questions you may have. Knowing how to navigate what you have to pay and what is negotiable is crucial for any homeowner.