Closing Costs: What Are They And How Much Will You Have To Pay?
You may already know certain home purchase or refinancing terms, such as "real estate agent" and "lender." You may already know that you pay closing costs when you close on your home, but what are closing costs, exactly, and how much will you owe at the closing table?
Closing costs add to your out-of-pocket costs, so it's a good idea to prepare your budget in advance. Learn more about closing costs, the amount you can expect to pay and who pays what.
What Are Closing Costs?
When you purchase a home, your lender and other third parties charge you fees for processing the loan. These may include property fees, insurance fees, mortgage fees and more. You pay these fees to your lender at closing when you purchase a home or refinance. These are typically paid out of pocket, though some closing costs may be rolled into the loan, depending on the type of loan and your lender.
You'll find out your estimated closing costs when your lender provides you with a Loan Estimate. You receive this within 3 business days after your lender receives your loan application. The estimate gives you a detailed list of how much you may owe at closing. Remember that it's just an estimate.
The Closing Disclosure provides you with the exact amount of your closing costs. You'll receive this document 3 business days before you close. It's a good idea to compare the closing costs on both documents to make sure there aren’t major changes.
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How Much Are Closing Costs?
Here's the question most buyers want to know: How much are closing costs, exactly? The actual amount you pay in closing costs depends on the home loan size. Closing costs are typically 3% – 6% of the purchase price of the home. If you’re refinancing, they’re typically about 2% – 6% of your loan amount.
For example, if you purchase a home for $200,000, you can expect to pay between $6,000 and $12,000 in closing costs. Getting preapproved can help you estimate closing costs in advance.
Who Pays Closing Costs?
You might think that the buyer pays all closing costs, but not necessarily.
While the buyer typically pays closing costs, the seller can also chip in. In some situations, the seller may pay closing costs as part of the sale negotiations or to help the buyer reduce the cash they need to bring to the closing table. When the sellers pay closing costs, these are called seller concessions.
Seller concessions are negotiable, depending on market conditions at the time of the offer. A seller might want to pay the buyer's closing costs in the case of a buyer's market because market conditions are not in their favor. The seller may use it as a "dangling carrot" to entice a buyer to purchase. Sellers may have more negotiating power in a seller's market, so they may not need to pay a buyer's closing costs because they have the advantage in the housing market.
If you're the buyer or the seller, let your real estate agent know that you're interested in negotiating to increase the likelihood of reaching an agreement faster.
What’s Included In Closing Costs?
We mentioned "fees" as part of closing costs above, but what is included in closing costs, exactly? Let's take a closer look at some property fees, mortgage fees and other additional fees that may be included. Remember, every situation, lender and home is different. Check with your lender to learn more about the closing costs specific to your purchase.
Some property-related closing costs may include:
- Appraisals: An appraisal occurs when a real estate appraiser determines the fair market value of a home you plan to purchase. Lenders order real estate appraisals to make sure they aren't loaning too much for a home.
- Property taxes: Property taxes are the local and state real estate taxes you pay to your local taxing authority for such services and amenities as public schools, road maintenance and police protection. Buyers typically pay city and county property taxes from the closing date until the end of the year.
- Escrow fees: When you purchase a home and then make an offer, many buyers offer earnest money for the purchase – usually about 1% – 2% of the home's final purchase price. In short, earnest money shows that you're serious about purchasing a home. Your real estate agent puts this money into an escrow account until the home buying process finalizes, then the escrow company releases the money. However, it’s important to note that there's another type of escrow account. In this type of escrow account, it's a portion of money that you pay each month for your mortgage. This money goes toward paying property taxes and insurance.
- Flood insurance: Flood insurance covers your home and/or personal belongings when they are directly damaged by flooding. Homeowners insurance and hazard insurance does not cover flood damage, which is why it's important to get a separate flood insurance policy if you live in a high-risk area. Your lender may require home buyers to purchase flood insurance if they live in an area at risk for flooding.
Some mortgage-related closing costs may include the following:
- Title search fee: Title refers to the legal ownership of property. When a new owner purchases property, the title transfers to them, which the local government records through public records. A title search reviews records to make sure a seller really does hold the rights to the property and can legally sell it.
- Loan origination fee: Lenders charge origination fees to arrange loans for borrowers. The origination fee typically covers loan processing, underwriting (which verifies everything from your income to your assets) and preparing all the documentation for your mortgage loan.
- Lender fees: Lender fees cover administrative costs, from pulling your credit report to wiring transfer fees. Your lender can give you a list of these fees.
- Attorney fees: Real estate attorneys prepare and review home purchase agreements and contracts. Note that only some states require an attorney to handle real estate transactions. Some charge a flat rate, while others may charge an hourly fee.
Some additional closing costs may include the following:
- Homeowners insurance: Homeowners insurance covers loss and damage to assets inside your home as well as damage to your home. Homeowners insurance protects both you and your lender because it typically provides enough coverage to restore your home to its original value if it were to become damaged or destroyed. Most lenders will require you to purchase homeowners insurance before they will agree to lend to you.
- Title insurance: Title insurance protects lenders from damages or financial losses when title defects pop up. Title defects can come in many forms, including claims filed against a title, outstanding liens and back taxes. Title insurance may also protect the lender from wills that state that a different owner owns the home. Note that there are two types of title insurance: lender title insurance and buyer title insurance. Lender title insurance does not protect the buyer from title defects.
- Private mortgage insurance (PMI): Conventional mortgage loan borrowers (borrowers who get non-government-backed loans) must purchase PMI if they make a down payment of less than 20% of a home's purchase price. PMI becomes part of the loan payment, protecting your lender if you stop making loan payments. However, buyers can choose to pay this insurance upfront at closing to help save money.
- Fees for government-backed loans: You may also have to pay fees at closing for certain government-backed loans, like FHA, VA and USDA loans. FHA loans, backed by the Federal Housing Administration, require you to pay an upfront mortgage insurance premium (MIP) of 1.75% – in addition to a monthly fee. VA loans, backed by the U.S. Department of Veterans Affairs, require home buyers to pay an upfront VA funding fee. The amount varies depending on the loan amount, buyer's service history and other factors. A USDA loan, backed by the U.S. Department of Agriculture, requires borrowers to pay an upfront guarantee fee as well.
Closing Costs FAQs
Let's take a look at a few commonly asked questions about closing costs.
How do I calculate closing costs?
Closing costs typically cost between 3% and 6% of the purchase price of the home.
You can estimate closing costs by multiplying the sale price by 0.03 (3%) and 0.06 (6%) to get a range. In other words, let's say a borrower purchases a $200,000 home.
You can convert 3% and 6% both to a decimal by dividing by 100, like this:
3/100 = 0.03
6/100 = 0.06
Then, multiply those percentages by $200,000:
$200,000 x 0.03 = $6,000
$200,000 x 0.06 = $12,000
Therefore, you can expect to pay between $6,000 and $12,000 in closing costs. Your Closing Disclosure, which you will receive 3 days before you close on your mortgage, will give you the final closing cost amount.
Can closing costs be included in the loan?
You may not have to pay closing costs out of pocket when you close. Buyers may be able to roll closing costs into the home loan or they can also negotiate to have the seller shoulder some of the closing costs. Note that if you roll closing costs into the home loan, you will inflate your home loan and pay more on your loan overall.
What are the average closing costs?
The average closing costs typically total between 3% and 6% of the purchase price. If you refinance, closing costs are about 2% – 6% of the loan amount. It's a good idea to ask your lender for more details about your particular mortgage loan to get the exact closing costs that apply to your situation.
When do I pay closing costs?
A home buyer will pay closing costs at the end of their home buying journey on closing day. Compare your Closing Disclosure with your Loan Estimate to make sure that all charges, the interest rate and loan terms look similar. Discuss any changes with your lender.
You may hear a term called "cash to close," which is the amount of money you’ll need to bring to closing. This may include more than just your closing costs. That’s because it adds in your down payment. However, it may subtract some fees that have already been paid by you or the seller and any fees you’re rolling into the loan.
Many lenders require a secure payment form, such as a cashier's check, certified check or wire transfer. You will likely not be able to pay closing costs with cash, credit cards or personal checks.
The Bottom Line: Closing Costs Are An Important Part Of The Home Buying Process
Closing costs come with the territory when buying a home. However, remember the seller may also pay closing costs, especially in a buyer's market. You may also be able to roll some into your mortgage, but that will increase the cost of your loan.
Carefully compare your Loan Estimate and Closing Disclosure and learn about the individual fees and spot any major changes in the costs before you close on your home.
Once you've paid closing costs for a home purchase, remember that if you choose to refinance, you'll need to pay closing costs again.
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