Mortgage Closing Costs Explained – Financial Services Hub

Getting a mortgage isn’t free. Many professionals like real estate attorneys and lenders work on your home purchase. They charge fees to complete the deal and your loan¹.

Closing costs are extra fees you pay when you finalize a home purchase. Both buyers and sellers pay these costs. They include things like origination and underwriting fees, real estate commissions, taxes, and insurance².

Before a deal is made, you must know the closing costs. These costs depend on the loan’s value, not the home’s¹.

Key Takeaways

Closing costs can include origination fees, underwriting fees, application fees, and processing fees¹.
Average closing costs can vary depending on the location and value of the property¹.
Closing costs typically range from 2% to 5% of the total loan amount³.
Borrowers with lower credit scores may face higher interest rates, affecting prepaid interest¹.
Buyers should be prepared to pay between 2% and 5% of the purchase price in closing costs².

Understanding Closing Costs

What Are Closing Costs?

Closing costs are fees tied to buying a home. They usually make up 3% to 6% of the loan’s total⁴. In 2021, the average cost for a single-family home in the U.S. was $6,905, including taxes⁴. But, costs can change a lot depending on where you live. For example, the District of Columbia had the highest average at 3.9%, while Missouri was the lowest at 0.8%⁴.

Buyers often pay 3% to 6% of the home’s price in closing costs⁴. So, for a $300,000 mortgage, you might pay about $9,000 to $18,000 in fees⁴. Real estate commissions, usually 5% to 6% of the home’s price, are also part of the costs. These are split between the seller’s and buyer’s agents⁴.

Lenders must give buyers a loan estimate within three business days of the mortgage application⁵. This includes the estimated closing costs and loan details. Three days before closing, lenders give a closing disclosure form. It shows the original and final closing costs⁵.

Closing costs include many fees, like appraisal fees, title insurance, and origination fees⁶. Lenders also collect two months of homeowners insurance for escrow and charge interest from the closing date to the end of the month⁵. The “Other” section of the closing disclosure might list optional costs, like owner’s title insurance or attorney fees, along with other fees⁵.

It’s important for homebuyers to understand closing costs to budget well and avoid surprises⁵. Knowing what to expect helps buyers negotiate and might lower their closing costs⁶.

Typical Closing Cost Amounts

Buying a new home means you’ll face closing costs. These costs usually make up 3% to 6% of the loan’s total⁷. For a $200,000 house, you might pay between $6,000 to $12,000⁷. But, the final cost can change based on where you live, the loan type, and the lender⁷.

In 2021, the average closing costs for a home in the U.S. were $6,905, including transfer taxes⁸. Washington D.C. had the highest costs at $29,888⁸. Missouri had the lowest at $2,061⁸.

Closing costs include many fees, like appraisal fees, title insurance, origination fees, and more⁹. With a median home price of $402,600 in the second quarter of 2023, closing costs could be between $6,442 (2%) and $19,325 (6%) with a 20% down payment⁹.

Knowing about closing costs and their parts helps you prepare for homeownership. Being informed lets you make better choices and maybe lower your costs⁷.

appraisal fees, title insurance, origination fees

When you buy a home, you’ll face several key fees. The appraisal fee is for a professional to check the home’s value. It usually costs between $300 and $500¹⁰. Title insurance is also a must, costing about 0.5% to 1% of the loan¹¹. You might also need an owner’s title insurance policy, adding to the costs.

The origination fee is what the lender charges for processing your mortgage. It’s usually 0.5% to 1% of the loan¹¹¹². There’s also an underwriting fee for checking if you can afford the loan. This fee is often a flat rate or 0.5% of the loan¹¹.

Make sure to look over the loan estimate from your lender. It lists all the closing costs and their fees¹⁰. Knowing these costs ahead of time helps you plan for buying a home.

Closing Cost	Typical Range
Appraisal Fee	$300 – $500
Title Insurance	0.5% – 1% of Loan Amount
Origination Fee	0.5% – 1% of Loan Amount
Underwriting Fee	0.5% of Loan Amount

Knowing about these fees helps you get ready for homeownership. It lets you make smart choices during the mortgage process¹¹¹⁰¹².

Closing Cost Breakdown

Buying a home means you’ll face closing costs. These can be 3 to 5 percent of the loan’s total amount¹³. You’ll pay for many fees, like the appraisal, title search, and insurance. Other costs include origination, underwriting, points, home inspection, and attorney fees.

The appraisal fee is about $300 to $425. It pays for an appraiser to check the home’s value¹³. Title search and insurance protect the lender from ownership issues. Origination and underwriting fees are 0.5 to 1 percent of the loan, covering the lender’s costs¹³.

Buying points can lower your interest rate, costing 1 percent of the loan for each point¹³. Home inspections and attorney fees are also your responsibility.

Closing costs change based on the loan type, lender, and property location¹⁴. Some lenders might help cover these costs. Always talk to your mortgage expert about your options¹³¹⁴.

Seller’s Closing Costs

Selling a home comes with a big bill for closing costs. These costs can quickly eat into the seller’s profits. In 2021, sellers paid about 1.8% of the home’s sale price in closing costs, not counting Realtor fees¹⁵.

Real estate agent commissions are a big part of these costs. They usually take 5% to 6% of the sale price¹⁵¹⁶. Sellers also pay for transfer taxes, escrow fees, and title fees, which can be $300 to $1,500 or more¹⁵. Escrow fees alone can be between $300 and $700 or more¹⁵.

Closing costs can total 2 to 5 percent of the loan amount, says Freddie Mac¹⁵. For a median-priced U.S. home at $387,600, sellers would pay about $6,977 in closing costs¹⁵.

Sellers can try to lower their closing costs. Negotiating a lower commission with the agent can make a big difference¹⁵¹⁶. They can also talk down costs with other service providers like lawyers, title companies, and appraisers¹⁵¹⁶.

Selling to a cash buyer can cut down on closing costs. There are no Realtor commissions or fees with cash buyers¹⁵¹⁶.

Knowing about closing costs and how to negotiate can make selling a home more profitable¹⁵¹⁶.

Negotiating and Lowering Costs

You can’t avoid all closing costs, but you can try to lower them. Look for lenders that offer discounts on origination fees or don’t charge them at all¹⁷. Also, check out down payment assistance programs that might cover some closing costs¹⁷.

Seller Concessions

Try to get the seller to pay part of your closing costs, known as seller concessions. Lenders set limits on how much sellers can give, usually up to 3-9% of the home’s value¹⁷.

By comparing services like home inspections and surveys, homebuyers might save a lot. For example, they could save up to $326 in Sacramento, Calif., and up to $528 in Broward County, Fla¹⁷. You can also negotiate on closing costs like application fees and rates locks¹⁷.

Both the buyer and the seller pay certain closing costs, usually 2% to 5% of the home’s price. These costs include credit check fees and title insurance fees¹⁷¹⁸.

Closing Cost Negotiation Strategies
Negotiate with the seller to pay for some costs Explore lender promotions for discounts Consider a no-closing-cost mortgage Review and negotiate fees on the Loan Estimate Look for local buyer assistance programs Evaluate different loan types

Using these strategies, homebuyers can lower their closing costs. This makes buying a home more affordable¹⁸.

“Closing costs can be a significant expense, but with some negotiation and research, you can find ways to lower them and make the home-buying process more manageable.” – Real Estate Expert

Stay informed, shop around, and negotiate closing costs to get the best deal¹⁷¹⁸.

Conclusion

Closing costs are a big part of buying a home, but you can prepare for them. Knowing what they cover helps make the process easier¹⁹. You’ll need Lender’s Title Insurance for both buying and refinancing, but Owner’s Title Insurance is only needed when buying and is optional¹⁹. Paying Discount Points can lower your interest rate, with one point being 1% of the mortgage¹⁹. Lender Credits can help cover closing costs, but you’ll get a higher interest rate in return¹⁹. No-cost loans mean the lender pays all costs except for the owner’s title insurance¹⁹. Prepaid charges include upfront payments for things like interest, taxes, insurance, and escrow adjustments.

Closing costs usually make up 2% to 6% of the loan amount²⁰. This includes fees for appraisals, title insurance, and loan origination²⁰. The Annual Percentage Rate (APR) includes the interest rate, lender fees, and other costs. Title insurance and closing costs affect the APR too²⁰. It’s important to compare APRs from different lenders to find the best deal.

Buyers usually pay most closing costs, but sellers have costs too²¹. The average closing costs for a home equity loan are 2-5% of the total loan, but it’s often closer to 1% since you borrow less than with primary mortgages²¹. Fees for loan origination and appraisals can be $300 to $450²¹. By negotiating with the lender and seller, buyers might reduce their closing costs.

FAQ

What are closing costs?

Closing costs are extra fees you pay when you buy a property. They cover services from your real estate lawyer and mortgage lender. These costs help finalize the deal.

How much are typical closing costs?

Closing costs usually are 3% to 6% of the loan’s total. In 2021, the average for a single-family home in the U.S. was ,905. Washington D.C. had the highest at ,888, and Missouri the lowest at ,061.

What are some common closing cost fees?

Common fees include the appraisal fee, title insurance, and origination fee. You’ll also pay for underwriting, points, home inspections, and attorney fees. Lenders must give you a loan estimate and closing disclosure with these costs.

Who pays the closing costs?

Buyers usually cover most closing costs, like the appraisal and title insurance. Sellers pay the real estate agent commissions and transfer taxes.

How can I lower my closing costs?

To lower costs, look for lenders offering discounts. Use down payment help programs, and ask the seller to cover some costs. This is called seller concessions.