After saving for a down payment, house hunting and applying for a mortgage, closing costs can come as an unpleasant surprise.
Understanding what closing costs cover and budgeting for them will help smooth out the final stretch of the homebuying process.
What are closing costs?
Closing costs include the myriad fees for the services and expenses required to finalize a mortgage. You’ll pay closing costs whether you buy a home or refinance.
How much are closing costs?
Average closing costs for the buyer run between about 2% and 6% of the loan amount. That means, on a $300,000 home loan, you would pay from $6,000 to $18,000 in closing costs in addition to the down payment.
The most cost-effective way to cover the costs is to pay them out-of-pocket as a one-time expense. You may be able to finance them by folding them into the loan, if the lender allows, but then you’ll pay interest on those costs through the life of the mortgage.
When buying a home, you can comparison shop and negotiate some of the fees to lower your closing costs.
How to determine your closing costs
A local real estate agent can help estimate closing costs based on your area and prospective home price.
After you apply for a mortgage, the lender will outline the projected closing costs along with other details in pre-approval documents. In the days before the closing, the lender will provide a final summary of the closing costs in a Closing Disclosure document. Review these documents closely and ask questions about anything you don’t understand.
Meanwhile, you can use a closing costs calculator to estimate how much you’ll pay.
Who pays the closing costs?
Most of the closing costs fall on the buyer, but the seller typically has to pay a few, too, such as the real estate agent’s commission and often a real estate transfer tax. Buyers can also ask sellers to pay some of their closing costs. When the seller agrees, it’s called a seller concession. The seller is more likely to contribute if there are more homes for sale than would-be buyers in the local market, or the property has issues that make it challenging to sell. Your real estate agent can help you decide the best negotiating strategy.
Closing costs for the buyer
Here are some of the most common fees you’ll run across, along with some cost estimates:
- Appraisal fee (Cost estimate: $500-$800).
- Discount points (Cost: One discount point equals 1% of the loan amount and typically reduces the interest rate by a quarter of a percentage point).
- Escrow account funds (Cost estimate: Varies widely).
- Flood determination and monitoring fees (Cost estimate: $50).
- Government recording fees (Cost estimate: $125).
- Loan-origination charges (Cost estimate: About 1% of the loan amount).
- Mortgage insurance or fees for government-backed loans (Cost: dependent on the loan type).
- Pest inspection (Cost estimate: $150).
- Prepaid expenses (Cost estimate: Varies depending on your loan amount and interest rate).
- Tax monitoring and research fees (Cost estimate: $150).
- Title-related costs
Closing costs for the seller
Sellers don’t get away without paying some closing costs, even if they decline to pay a portion of the buyer’s share. The most significant closing costs for sellers are:
- Real estate agent commissions (Combined the commissions are about 6% of the sale price of the home).
- Property and transfer taxes (These vary by jurisdiction).
- Title insurance
Talk It Out
Sometimes all it takes is sitting down with a mortgage expert and chatting about your goals and qualifications before you can make a decision. There may even be down payment assistance programs or first-time home buying grants that you’re unaware of and having someone with your best interest will point it out.