When you find the home of your dreams, you might focus on the purchase price and property taxes, estimating what your monthly costs will be. But it’s also important to think about closing costs. The various fees associated with closing can add up to thousands of dollars that you’ll owe when you finalize the sale. Read on to learn more about closing fees, and get some tips for reducing them.
What are closing costs?
Closing costs are the fees you pay to finalize your mortgage beyond the home’s purchase price—namely service fees, commissions, and taxes. A typical buyer pays 2 to 5 percent of the home’s purchase price in closing costs. This varies based on the state you live in, your lender, and the size of your loan.
Who pays for closing costs?
Generally, the buyer pays fees related to their mortgage loan, and the seller pays real estate agent commissions and fees for transferring ownership of the property. However, closing costs are negotiable. As the buyer, you may be able to persuade the seller to pay some of your closing fees.
How much are closing costs?
Closing costs generally range from 2 to 5 percent of your home’s purchase price. The amount you pay depends on your loan amount and local tax laws.
What types of fees are included in closing costs?
Closing costs might include:
- Loan origination fee, also known as an underwriting or processing fee. This is a fee that your lender charges for preparing your mortgage loan. It usually comes to about 0.5 percent of your total loan amount.
- Mortgage application fee, which your lender may charge to process your application. This fee might include the cost of doing a credit check. This fee varies but is usually about $550.
- Appraisal fee, which the appraisal company charges to verify the market value of the home you’re buying, to make sure it’s worth the amount of your mortgage loan. This fee usually runs about $300 to $400.
- Title search fee, which pays for research to ensure that the party selling the house really owns it, and that no one else has a claim to the property you’re buying. This fee is usually around $200. A buyer can also purchase owner’s title insurance, to protect against someone making a claim on the home after closing.
- Recording fee, paid to your local city or county recording office, for legally recording the new deed and mortgage.
- Escrow fee, paid to the escrow company or an attorney for overseeing the closing.
- Home inspection, to check that the home is structurally sound and to determine any necessary repairs. Home inspection fees usually range from $300 to $500.
- Pest inspection, which is required in some states and for homes being purchased using an HOA loan.
- Homeowner’s insurance, the first year of which is sometimes paid at closing.
- Property taxes, two months of which are usually paid upfront to the city and county.
- Prepaid interest, which is also called “interim interest.” Lenders often ask the homebuyer to prepay the amount of interest owed between the time they sign their loan and when they make their first mortgage payment.
- Private mortgage insurance, if your down payment is less than 20 percent of the home’s purchase price. Mortgage insurance usually costs between 0.5 and 5 percent of your home’s purchase price. At closing, you may be asked to make your first month’s insurance payment or your first year’s premium.
- Homeowners Association fee, which, if you’re buying a condo or townhouse, you may have to pay upfront.
Other closing costs may also apply. Talk to your real estate agent.