Are you surprised that closing costs are also included in a mortgage and the down payment? What are these? How much are they? Can you reduce them?
Closing costs are the fees you refund a lender for processing the closing of your mortgage loan. As financial companies pay many entities to assess the property and your finances. They may sum up to 2% to 6% of the home’s sale price. And yes, there are ways to reduce them.
Let’s say, you are looking to buy a home that costs $200,000 in cash. You don’t have to pay a mortgage’s total price upfront. You only need to settle the closing costs of about $4,000 to $10,000. You must also put a down payment of 20% of the home’s sale price. The closing costs and down payment comprise the total “cash to close” a mortgage.
$4,000 can still be a lot to pay for closing costs. But, down payment assistance (DPA) programs are available so you only need to worry about one part of the cash to close.
Closing a mortgage loan is the last piece of the home-buying puzzle. It is the last step before getting your keys to your own home. To understand why closing costs are significant, read the guide below. It also includes information on how to reduce them and where you may apply for help.
On to settling closing costs and buying your own home!
Express Takeaways
- Closing costs are fees you refund a lender to process your loan and transfer home ownership.
- Closing costs are 2% to 5% of the home’s sale price.
- Closing costs cover fees for different entities involved in closing the loan.
- Closing costs are due on the closing date.
- Closing costs vary for both the buyer and the seller.
- Cash buyers may have lower closing costs as they do not have to pay lender-related fees.
- Loan Estimates and Closing Disclosure help determine closing costs.
- There are ways to reduce and budget for the closing costs.
- Programs help pay the closing costs and negotiate with lenders.
What are Closing Costs?
Closing costs are fees you pay to process your loan. They also settle the transfer of the home’s ownership to you.
Why Are Closing Costs Necessary?
Closing costs are necessary as they pay all the entities involved in
- Gathering legal documents.
- Handling the money involved.
- Closing your loan.
The total closing costs may vary, and the sale price of a home may affect it.
How Much Are Closing Costs?
Closing costs range between 2% to 6% of the home’s sale price.
What’s Included in Closing Costs?
Closing costs may include the fees for the following:
- Appraisal fees
- Tax service provider fees
- Title insurance
- Government taxes
- Prepaid expenses (property taxes, homeowners’ insurance, and interest).
No one party pays it all since both the seller and buyer are involved.
Who Pays the Closing Cost?
Generally, the buyer pays for all the fees associated with home buying. However, depending on the agreement and the law, the seller sometimes pays some closing costs.
How Does Paying for Closing Costs Work?
Once you pick a home to buy, you and your real estate agent will write an offer to the seller. If they accept it, both parties then sign a Buying Agreement. This places you in a 30-day contract to do due diligence before closing the loan. It’s when you may start applying for a mortgage loan application.
The lender will provide you with a Loan Estimate three days after your application. You have 10 business days to respond to it and signify your interest in the loan.
Once you do, the lender will hire people to close the mortgage loan. At the same time, they will review your financials to see if you can repay the loan within the term. The lender will contact people to check the property. Usually, they have an inspector, appraiser, and a title company to do it for them. The outcome of their jobs also allows you to check every aspect of the property and decide if you will buy it.
Three business days before the end of the contract, the lender will send a Closing Disclosure. It has all the data about the loan and the fees incurred in processing and closing it. It also contains the “cash to close” you must have on the agreed date. It is the total amount of the closing costs and the down payment.
In the closing, you pay the cash to close, sign documents, and have the ownership of the house transferred to you. After a few business days, you get the keys to your new home.
When are Closing Costs Due?
The closing costs are due on the scheduled closing date.
How Much are Closing Costs for the Buyer?
The total closing costs for each buyer may vary depending on different factors. The lender, government, location, and situation may all affect how much a buyer must pay.
Credit Report
Credit report fees cost $30 to get your credit report. It is the only fee a lender may ask you before providing a Loan Estimate.
Application
The application fee may range up to $500 which covers the time required by a lender to:
- Review your loan application and financial documentation.
- Confirm that you qualify for a loan.
- Identify the amount of money the lender is willing to loan you.
Some mortgage lenders do not ask for an application fee.
Appraisal
An appraisal fee costs $300 – $1,000, depending on the house size and area. It is the payment for an appraiser’s opinion on a house’s worth.
Attorney
A real estate attorney may charge between $500 and $1,500 for legal services to close a mortgage loan.
Escrow
A state may ask for a mortgage closing agent or an escrow agent to do the following:
- Gather the legal documents.
- Handles the money involved in the home sale.
- Closes the loan.
The escrow fee varies as it composes the base fee and the home’s sale price.
Courier
A courier fee may vary depending on the company and the distance of delivery for the documents.
Discount Points
The upfront fee you pay to lower the interest rate of a mortgage loan is one point, which is also 1% of the loan amount. The reduction in the interest rate depends on the lender, the kind of loan, and the mortgage market.
FHA Mortgage Insurance
Federal Housing Administration (FHA) insured loans need an upfront Mortgage Insurance Policy (MPI). This policy protects lenders against losses from any mortgage loan default. The annual MIP is 0.80% to 1.05% for 30-year mortgage terms, while the rate is only 0.45% to 0.95% for a 15-year term.
Flood Insurance
Mortgage lenders ask you to pay for flood insurance if the home is in a flood-prone area. Costs vary, and the policy is implemented 30 days after its writing.
Homeowners Association Transfer Fee
A fee that covers association costs in transferring the ownership of a property from a seller to a buyer. Depending on state laws and HOA policies, the buyer or the seller may pay for it.
Homeowners Insurance
This insurance protects the lenders if the property is damaged unexpectedly. The national average rate is $2,777, depending on coverage levels and location.
Loan Origination Fee
The lender’s fee to the borrower for making the mortgage loan. It includes fees for processing the loan, underwriting, funding, and other administrative services. The price varies by lender and the loan amount.
Title Insurance
Title insurance protects the lender and the owner from any claims on the property. It is 0.5%—1% of the home’s sale price, paid as a one-time payment.
Lead-Based Paint Inspection
The law mandates this inspection for homes built between 1960 and 1978. The homebuyer must know if the house has lead-based paint and hazards. Depending on the size of the house, the buyer may pay at least $370.
Pest Inspection Fee
A VA loan and a state may need a wood-destroying insect inspection. Depending on the state, taxes, labor, and fuel costs, it may cost around $150.
Prepaid Daily Interest Charge
A daily interest between the closing date and the first monthly mortgage payment. It is a per-day (per diem) interest cost multiplied by the number of days left for the month.
Private Mortgage Insurance (PMI)
A PMI is usually required for down payments of less than 20% of the home’s sale price. It protects the lender from losses if the borrower cannot settle the loan.
Property Tax
All natural and personal properties are subject to property tax unless exempted by the law. The tax goes to public schools, fire protection, libraries, parks, and recreation. It is in dollars per thousand dollars of assessed home value.
Rate Lock Fee
Fee for a locked interest rate to close a loan within a specified time.
Recording Fee
The state and local governments assess the fee for recording your deed, mortgage, and other documents related to your home loan.
Survey Fee
A land survey costs around $525 and is required by lenders and/or buyers for any title-related purpose. The home’s history, size, location, and other factors may impact the total fee.
Tax Monitoring and Status Research Fees
Such fees are for paying a company that calculates property taxes. The area and the firm will affect the total amount of these fees.
Title Service Fees
Title service fees are for issuing a title insurance policy for the lender. The buyer then receives a deed showing the ownership transfer or the home title.
Transfer Tax
When transferring a property from one owner to another, there is a transfer tax for both the city and the state. The amount paid for the home impacts the tax due.
Underwriting Fee
A payment to a lender for processing the loan.
VA Funding Fee
A one-time payment for VA loans lowers the loan cost for U.S. taxpayers. The loan type, loan amount, and down payment affect how much funding fee to pay.
How Much are Closing Costs for Cash Buyers?
Since cash buyers do not have to deal with a mortgage lender, they are free from lender-related costs.
How Much are Closing Costs for the Seller?
The seller may also have to pay for services and settle payments to cover their part in closing a loan.
Attorney
A seller may hire a real estate attorney to process and finish the loan closing. An attorney’s hourly rate or fixed rate may vary.
Credits Toward Closing Costs
Depending on the negotiation, a seller may agree to help a buyer pay some of the closing costs.
Escrow
The fee for creating an escrow account. It stores the buyer’s money for taxes, insurance, or other charges.
Homeowners Association (HOA)
A seller may have to settle the HOA fees before selling their home.
Prorated Property Taxes
A seller must update the property taxes before a buyer takes over the payments.
Real Estate Agent Commission
Payment for a real estate agent who listed the property and assisted both parties in the home sale.
Recording and Transfer
The payment for recording and transferring the title to local and state governments.
Title Insurance
The seller may also have to pay for title insurance to protect the home.
How to Determine Your Closing Cost?
A Loan Estimate lets you know how much closing cost you will pay. The closing disclosure is more accurate since the tasks of closing the loan have already been completed. So, the fees stated in it are more accurate.
How to Reduce Your Closing Cost?
Closing costs are still a lot to pay but following the below tips may help reduce them.
Compare Lenders’ Prices
Review the loan estimates to see which offers the lowest lender’s fees.
Ask for Lender Credits
If you don’t have much money upfront to pay for the closing costs, you may request lender credits. The lender gives money to pay for the closing costs in exchange for a higher interest rate.
Check if your Bank Offers Discounts for Origination Fees
Companies such as Bank of America offer a ‘Preferred Rewards’ program. This program provides a $200 reduced origination fee on a new sale or refinance of a mortgage.
Cut Prepaid Daily Interest Charge by Closing at the End of the Month
As mentioned above, a prepaid daily interest charge is based on the number of days left in the month. If you close at the end, you only have to pay a few days of the per diem interest.
Negotiate with the Seller to Contribute
The buyer may ask the seller to pay some closing costs especially if the home is in a slow market.
How to Budget for Your Closing Cost?
The same down payment budgeting tips may also help you save for closing costs. If you are a first-time homebuyer, you may apply to our programs to help you pay a part of it.
Aside from the down payment, the closing costs comprise the “cash to close” a mortgage loan. It’s 2% to 5% of the home’s sale price that pays all the entities involved in closing a mortgage loan. In the closing, the seller transfers the ownership of the house to you. So, you must have the closing cost to make it happen. If you are a first-time homebuyer, you can apply for programs that can pay a part of it. You don’t have to wait until you have enough “cash to close” to buy a home with programs in the Home Buyer Wallet.
Article Sources
Homebuyer Wallet requires its writers to get information from original and reliable resources.
Find our standards in producing factual information and content in our editorial policy.
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