Closing Costs Explained

You should budget for closing costs as soon as possible in the mortgage application process, whether you’re a first-time buyer or refinancing.

The term “closing costs” refers to a wide range of additional expenditures associated with purchasing a property. They include things like up-front tax payments, homeowner’s insurance, and processing costs from the government. Closing costs could need a greater down payment, higher monthly mortgage payments, cash at closing, or a smaller cash-out refinance.

Here’s a rundown of what goes into calculating closing expenses, as well as some ideas for reducing them to a manageable amount.

What Are Closing Costs?

Typically, closing costs are covered in full on the day that a home purchased as well as the funding that makes it possible is finalized, and can range from two percent (2% ) to five percent (5%) of the purchase price.

Loan origination fees, appraisal fees, title insurance, and escrow fees are all part of the closing costs you might expect to pay. Legal fees and the cost of the loan’s origination and underwriting are only two examples of paperwork-related expenses. The costs associated with the property itself (such as an appraisal to establish its value and a search of property records to validate its ownership) are also included.

In most cases, a cashier’s check (rather than a personal check) is required to cover closing costs in addition to the down payment.

How Much Are Closing Costs?

Buyer closing expenses typically constitute between two and five percent of the loan balance. Thus, if you were purchasing a home for $300,000, you could expect to pay anything from $6,000 to $15,000.

You can save the most money on closing fees by paying for them all at once out of pocket. If your lender will allow it, you can roll these expenditures into your mortgage and pay interest on them over the course of the loan.

Closing costs can be reduced by careful price comparison and haggling over certain charges often associated with purchasing a home. Additionally, there are low-interest financing programs and subsidies available to assist first-time homebuyers in a number of states, counties, and municipalities with the fees associated with closing on a house purchase. Inquire with the municipal authorities to find out what services are offered in your area.

Different Types of Closing Costs

Property-related fees

• Fee for Appraisal – Lenders need to determine if the value of the collateral exceeds the loan request. Two factors account for this: The lender must ensure the loan amount you want is reasonable and that it can be recouped from the worth of the property in the event of a default. A certified professional appraiser will often charge between $300 and $400 for their services.

• House Inspection – It is common practice for mortgage lenders to demand an inspection of the property being financed, especially if the financing is government-backed.
  
  A bank will not loan you a large sum of money unless they are satisfied that the house is safe and habitable. Possible price reduction negotiation based on inspection findings. However, if both you nor the seller can’t agree on how to fix the difficulties, you can choose to cancel the contract, depending on how serious the problems are. In most areas, the cost of a home inspection will run you between $300 and $500.

Loan-related fees

• Application fee – Credit checks and other administrative costs associated with completing your new loan application are covered by this fee. The application fee is calculated by the lender depending on the time and effort required to complete your loan request.

• Assumption fee – You might have to pay a variable fee proportional to the loan’s balance if the seller holds an assumable mortgage plus you assume the loan’s remaining balance.

• Prepaid interest – Be prepared to repay the interest accrued on the mortgage from the settlement date to the first monthly bill due date, which will vary depending on the size of the loan.

• Loan origination fee – That’s a huge step forward. It’s sometimes called an underwriting charge, a processing charge, or an administrative charge. Lenders assess an origination fee for the time and resources expended in processing your mortgage application. Lender legal fees, notary costs, and document preparation are all things that may fall under this category. Loan fees are around 0.5 percent of borrowed funds. Example: A loan of $300,000 would incur a $1,500 origination fee.

Title Fees or Attorney Fees

• Title search fee – The seller’s right to sell the home is verified through a title search, as are any claims or liens that may be filed against the property. Especially if the property records aren’t digitized, this can be a lot of manual work. Title search costs are around $200, though this can vary widely depending on the company and the area. Title insurance premiums may include the search fee.

• Attorney’s fees – At the time of closing on a property, a real estate attorney is needed in several states. As the amount of hours the lawyer spends on your case rises, so will the bill.

• Lender’s title insurance – Lenders want to make sure they’re covered in case something goes wrong with the title search as well as a new claimant comes up after the sale. This is why they require a loan policy. Insurance will remain in effect until the loan has been repaid in full.

• Owner’s title insurance – You should also think about getting title insurance in case there are any issues with the title or claims filed on the property after the closing. Your family will be protected for as much as you or they are the legal owners of the home.

Property taxes and homeowner’s insurance

• Property taxes – At closing, purchasers typically pay two months’ worth of municipal and county property taxes.

• Annual assessments – There may be a one-time annual charge that must be paid to your condo or homeowners association.

• Insurance cost for a home – Homeowners insurance protects your property in the event of theft, vandalism, natural disasters, and other calamities and is typically required by your lender prior to settlement. Monthly condo fees may include insurance premiums for some societies. Where you reside and the value of your home is major factors in determining the amount.

Mortgage Insurance

• Cost of applying for a mortgage insurance policy – In the event that your down payment is less than 20%, private mortgage insurance can be required. (Private mortgage insurance protects the lender from a loss if you default on your loan but does not cover damage to the home itself.) Lenders have different application fee structures.

• Initial mortgage insurance premiums – Borrowers may be asked to pay mortgage insurance premiums in one annual installment or in a single lump sum for the duration of the loan. According to Genworth, Ginnie Mae, and the Urban Institute, the cost of mortgage insurance can range from 0.55 percent to 2.25 percent of the purchase price.

• FHA, VA and USDA fees – Mortgage insurance premiums paid to the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA) are examples of government-imposed costs associated with obtaining a loan.

Who Pays Closing Costs?

Closing expenses are negotiable between the buyer and seller, but normally the seller pays the real estate broker’s fee and the buyer pays the costs associated with getting a loan. Depending on local customs and mandatory state regulations, either party can be responsible for paying real estate transaction charges.

A seller may reimburse the purchaser for certain closing expenses. If the sales price is $250,000 but the seller agrees to cover $5,000 of the buyer’s closing costs, the buyer would end up paying only $245,000.

How Do I Reduce Closing Costs?

While it’s hard to completely eliminate closing costs (taxes, for example, are always going to be due), there are steps you can take to lessen their amount.

1. Find lenders that provide discounts. Look at lending institutions that don’t charge origination fees, or at least give discounts. If you’re acquiring your mortgage from your bank, you could also try to ask for discounts or fee exemptions, as you’re already a client.

2. Send in your application for help paying the mortgage’s down payment. If you’re a first-time purchaser, research down payment assistance as well as grants that can help you afford closing costs.

3. Get your own experts to help you. Real estate brokers and lenders often deal with various lists of professionals and these favored vendors may be more costly than others you can employ yourself. If you’re prepared to put in the time and effort, you might be able to reduce costs by handling part of the hiring of services on your own.

4. Inquire about loyalty benefits. The credit union or bank where you hold your savings or checking accounts may give discounts or other incentives to existing clients who apply for mortgages with them. 

5. Take into account no-closing-cost loans. No taxes will be paid for by these plans, but the amount of cash you need to bring to closing can be considerably reduced. Keep in mind that they will likely require you to “credit” the charges by trying to add them to the sum of your loan and distributing the payments (and any interest costs) out over the term of the loan, or accept a higher rate of interest than you would if you paid the fees upfront.

Final Thoughts

When buying a home, you will inevitably have to pay some closing costs. You can save a lot of money on these charges if you take the initiative to compare shops and carefully examine your loan estimate alongside your closing disclosure. Keep in mind that closing expenses can vary widely depending on where you live in the country.