What are closing costs?
Closing costs are payments that occur when finalizing a real estate transaction, such as the sale or purchase of a house. Both home buyers and sellers pay closing costs. But who pays which closing costs, and how much they pay, varies.
A home loan amount, a property’s location, and a home buyer’s credit score are some of the factors determining closing costs. Some state laws require professional services that increase a transaction’s closing costs. On average, closing costs in home buying account for 2% to 6% of a property’s purchase price.
Many closing costs are negotiable between home buyers, sellers, and mortgage lenders. If you’re buying a property, it’s crucial to research and shop home loans before choosing a lender.
When do you pay closing costs?
Closing costs are due when you sign documents transferring property ownership. You usually make the payment using a wire transfer or cashier’s check.
Many mortgage lenders require an escrow account, where some of the closing costs will be deposited. This money covers some of your expected property taxes and mortgage payments. The amount your lender requires varies, but is often two months of your homeowner’s insurance premiums and property tax payments.
Typical closing costs for buyers
Each real estate deal is different, but there are typical closing costs that home buyers can expect. Below is an alphabetical listing of these expected costs.
- Application fee: Before applying for a mortgage, ask your lender if they charge an application fee. If so, make sure you understand what it covers. Sometimes application fees are negotiable, but you might need leverage in your negotiations. That’s why it’s essential to shop around and know what other lenders ask for an application fee.
- Appraisal: In most deals, you’ll need to pay an appraisal company to assess the property’s fair market value.
- Association dues: If you’re buying a property included in a homeowners or condo association, you may have to pay your annual dues at closing. The buyer and seller can split this cost. For example, you might owe a prorated amount of your association’s annual dues if you buy a property partway through the year.
- Attorney fees: Some states require lawyers to review a real estate transaction’s closing documents. If so, both the buyer and seller have legal representation, and attorney fees usually apply.
- Courier fee: Sometimes, your lender will use a courier to deliver documents required to close a deal. Doing so can expedite finalizing the transaction, but you may pay a courier or postage fee as a result.
- Credit report fee: Your mortgage lender will run a tri-merge credit report, and they’ll charge a fee to cover the cost of those reports. The reports retrieve your credit score and history from the three major credit bureaus.
- Discount points: These “points” represent money you pay your lender at closing to receive a lower interest rate. One discount point equals 1% of your home loan amount in exchange for dropping your interest rate 25%. For example, you pay your lender $1,000 for a $100,000 mortgage loan. They then reduce your 4% interest rate to 3.75%.
- Escrow deposit: Many lenders require you to have an escrow account for your expected property taxes and homeowner’s insurance premium. Your lender makes your insurance and tax payments for you using the money you deposited into your escrow account at closing.
- Escrow fee: If you’re required to set up an escrow account, a title company, escrow company, or a lawyer will manage the process. They’ll charge a fee for doing so. Often, home buyers and sellers agree to split this cost.
- Flood hazard determination fee: The U.S. government requires a flood risk assessment for all real estate transactions. A third party handles the evaluation and they’ll charge you a fee for their service. You’ll have to pay for flood insurance if they determine your property’s in a flood zone.
- Home inspection: Usually, you’ll have a professional run a home inspection before buying a property. This fee covers that service.
- Homeowner’s insurance: Homeowner’s insurance is usually not required by law—but most lenders require it. Plus, it’s a good idea to have it in case of damage to the property. You’ll usually pay your first year’s insurance premium at closing.
- Lender’s title insurance: Your mortgage lender often requires you to pay for insurance protecting the lender in case there’s an issue with your property’s title. In some cases, the seller agrees to cover this cost.
- Lead-based paint inspection: Most states don’t require an assessment of a single-family home’s lead-based paint risk. Some locations do require it when buying whole properties with multiple units, such as apartment buildings. Even if you’re not obligated to do so, you should pay for a lead-based paint inspection if you’re buying a property built before 1978. Doing so can save you money in future remediation costs. And ensuring a healthy home environment is the right thing to do for your tenants.
- Mortgage broker fee: You might hire a mortgage broker to help you find a mortgage loan. If so, they’ll charge you a commission based on the percentage of your loan amount. This cost is usually between .5% and 2.75% of the property’s purchase price.
- Owner’s title insurance: This insurance covers you in case someone challenges your property’s title after you take ownership. A single payment at closing pays the insurance premium. Often the seller agrees to make this payment.
- Origination fee: Most lenders charge an origination fee when processing your home loan application—usually 1% of your loan amount. Not all lenders charge an origination fee, however, so it’s essential to research different mortgage lenders.
- Pest inspection fee: Some states require home buyers to pay for a termite inspection. Even if you’re not required to do so, you may want to pay for a pest inspection to ensure you’re not buying a damaged or infested property.
- Prepaid interest charges: Most mortgage lenders require you to pay interest upfront for your mortgage loan. This cost covers interest that your loan accrues between your closing date and first mortgage payment.
- Private mortgage insurance (PMI): Lenders usually require you to carry private mortgage insurance if your down payment is less than 20% of your home loan amount. PMI covers your lender if you miss a mortgage payment. Lenders have varying PMI costs but usually range from .5% to 2.3% of your loan amount. There are four ways to pay for your PMI premiums.
- Upfront: Also called a single premium, meaning you pay the entire cost of your PMI at closing. Doing so keeps you from dealing with monthly PMI payments. However, you’ll need more money at closing. And you won’t receive your PMI funds back if you refinance your loan.
- Split: This option is when you pay part of your PMI costs upfront. Your lender folds the remaining balance into your monthly mortgage payment.
- Monthly: You pay nothing on your PMI at closing. Your lender adds your entire PMI balance to your monthly mortgage payment.
- Lender-paid: Your mortgage lender covers your PMI costs in exchange for raising your interest rate. This method can save you money at closing but cost you more in the long term.
- Property taxes: You’ll typically owe taxes for the property you’re buying from your closing date until the end of the tax year. If the seller already paid that year’s property taxes, you’ll owe a prorated amount. If the seller hasn’t paid that year’s property taxes, they’ll often credit the home buyer for the number of days the seller owned the home. Doing so reduces the amount of property taxes the buyer owes at closing.
- Recording fees: Your local government requires a copy of your title before they recognize you as the property’s legal owner. Your title company usually handles this transaction, but they’ll charge you a fee for that service.
- Survey fee: This fee covers hiring a professional surveyor to verify the borders of the property you’re buying.
- Tax service fee: Most mortgage lenders require home buyers to pay for a third party to ensure the taxes are current on a property. The amount of tax service fees varies, and buyers typically pay the cost. However, tax service fees may be negotiable with your lender.
- Title search fee: Before buying a property, you need to verify its ownership. A title company handles this process, ensuring no one else can claim the property after you purchase it. The company charges a fee for their service. While the amount varies by location and property, title search fees tend to range from $200 to $1,000.
- Underwriting fee: Some mortgage lenders charge an underwriting fee to pay for reviewing your home loan application. If a lender charges this fee, they usually don’t also charge an origination fee.
Typical closing costs for sellers
Each real estate deal is different, but there are some closing costs that sellers can anticipate. Below is an alphabetical listing of these expected costs.
- Association dues: If you’re selling a property in a condo or homeowners association, you may owe dues to the association. If so, you’ll likely need to make your property’s dues current at or before closing.
- Association transfer fees: If selling a property included in a condo or homeowners association, your association may require you to pay a fee to transfer ownership to the buyer.
- Attorney fees: Some states require lawyers to review a real estate transaction’s closing documents. If so, both the buyer and seller have legal representation, and attorney fees usually apply.
- Escrow fee: A buyer’s mortgage lender may require them to set up an escrow account. If so, a title company, escrow company, or a lawyer will manage the process. They’ll charge a fee for their service. Home buyers and sellers often agree to split this cost.
- Closing cost credits: These are credits you give the buyer to lower the property purchase price. You may extend closing cost credits to incentivize a transaction. For instance, a buyer may be hesitant to buy your property because it needs repairs. You can give them a credit, reducing the property’s cost, to cover some of that work.
- Lender’s title insurance: The home buyer’s mortgage lender may require insurance protecting them in case there’s an issue with your property’s title. Often the buyer pays this cost, but in some cases, the seller does.
- Owner’s title insurance: This insurance covers the buyer in case someone challenges the property’s title after they take ownership. A single payment at closing pays the insurance premium. Often the seller agrees to make this payment.
- Property taxes: As a seller, you’re responsible for paying property taxes up until your closing date. If you have unpaid property taxes, the buyer may agree to pay them in exchange for you reducing the property’s purchase price.
- Real estate agent commissions: Sellers usually pay real estate agent commissions, typically 4% to 6% of a property’s purchase price. The commission is typically split between the seller’s and buyer’s agents.
- Transfer taxes: A transfer tax is assessed by your local government when you sell or transfer a property from yourself to a new owner. The amount varies by state and city.
Loan-specific closing costs
Some home loans come with unique closing costs. Below are three real estate loan products with closing costs.
- Home equity loans or home equity lines of credit (HELOCs): Lenders may charge fees for home equity loans or home equity lines of credit. These fees are usually 2% to 6% of a loan amount.
- Refinancing: Mortgage refinancing fees vary by lender, but typically are 2% to 6% of the loan amount.
- VA home loan: U.S. military veterans and active service personnel may be eligible for a VA home loan. These mortgages are supported by the U.S. Department of Veterans Affairs and administered by mortgage lenders. To help pay for the loan program, the VA charges a fee of 1% to 5% of the loan amount. Your down payment amount and length and type of military service impacts your fee. The VA exempts some lenders from charging this fee, though, so it’s worth shopping around before choosing a lender.
