Understanding Closing Costs
Closing Costs for Home Buyers
In addition to the down payment for your new home, you’ll also have to pay closing costs — miscellaneous fees charged by those involved with the home sale (such as your lender for processing the loan, the title company for handling the paperwork, a land surveyor, local government offices for recording the deed, etc.).
On average, homebuyers pay closing costs ranging from 2% to 5% of the purchase price. Unfortunately, this is only a ballpark figure, as there are many variables in each individual transaction. Many lenders will require that you apply for a loan prior to receiving a more precise estimate of closing costs; however, some lenders are more transparent with their available options and will do the necessary legwork to provide you a better idea of those costs.
The key factors in determining the closing costs you will pay include the loan program, your credit scores, the escrow and title company, the down payment, and any negotiated seller concessions. Let’s take a closer look at the typical closing costs paid by homebuyers.
What Are Closing Costs?
As mentioned previously, “closing costs” is a collective term for the various fees and charges you’ll encounter when buying a home. Some of these fees come from the lender and others come from third parties that are involved in the transaction, like home appraisers, homeowner associations (HOAs), and title companies.
The types of closing costs you pay will depend on the kind of loan you’re using, as well as other factors.
Typical closing costs include:
- Fees relating to obtaining a credit report
- Loan origination and processing fees
- Home appraisal fees (though more often than not, they are paid in advance)
- Discount points, which can be used to secure a lower mortgage rate
- Title search and escrow service fees
- Title insurance fees, to cover both the lender and the homebuyer
- Mobile notary fees
- Pre-paids: escrow deposits to cover first two months’ property taxes and homeowners insurance.
- Recording fee paid to the city or county for recording the new land records.
- HOA transfer fees
Again, these are just some of the typical closing costs for homebuyers. Depending on your situation, you might encounter additional costs that are not on this list – and some of these fees might not apply to your situation.
Finalizing Closing Costs
As mentioned previously, closing costs tend to average between 2% and 5% of the purchase price.
So, if you’re buying a house that costs $200,000, your closing costs might fall between $4,000 and $10,000 (on average). That’s a pretty wide range and isn’t something you can really use for planning purposes. That’s where the new Loan Estimate can give a much more detailed breakdown when you actually start the loan process.
Soon after you apply for your home loan, the lender will give you a document known as a Loan Estimate. This standardized, three-page document gives you a lot of important information about your new loan. Page 1 includes your loan amount, mortgage rate, and estimated monthly payments, as well as an estimate of your total closing costs. Page 2 provides an itemized breakdown of the various costs associated with your loan.
Discount Points and Lender Credits
- Borrower ‘1’ might decide to pay mortgage discount points in exchange for a lower interest rate.
- Borrower ‘2’ might avoid paying points in order to reduce the upfront costs.
- Borrower ‘3’ might forego the discount points and opt for a slightly higher rate, in order to get a lender credit to further reduce closing costs.
These choices could result in a difference of several thousand dollars in the amount these buyers pay to close their loans. That’s why it’s best to take the time to sit down with your mortgage lender so they can understand your situation and what’s most important to you, the borrower!
In closing, here’s a great tip – ask the seller to pay some of the closing costs. If you’re short on cash for the closing costs and can’t roll the closing costs into the mortgage, ask the seller if they’re willing to pay part of the closing costs. It’s not unusual for buyers to ask for this. Usually the worst that can happen is that they say no.