What Are Closing Costs and How Much Are They Typically?
What are closing costs?
Closing costs are fees associated at the closing of a real estate transaction. The closing point is when the title of the property is transferred from the seller to the buyer. Closing costs are incurred by either the buyer or seller.
What charges go into your total closing costs?
Closing costs vary widely based on where you live and the property you buy. They often include things such as:
- A fee for running your credit report.
- A loan origination fee, which lenders charge for processing the loan paperwork for you.
- Attorney’s fees.
- Charges for any inspection required or requested by the lender or you.
- Discount points, which are fees you pay in exchange for a lower interest rate.
- Appraisal fee.
- Survey fee, which covers the cost of verifying property lines.
- Title insurance, which protects the lender in case the title isn’t clean.
- Title search fees, which pay for a background check on the title to make sure there aren’t things such as unpaid mortgages or tax liens on the property.
- Escrow deposit, which may pay for a couple months’ property taxes and private mortgage insurance.
- Pest inspection fee.
- Recording fee, which is paid to a city or county in exchange for recording the new land records.
- Underwriting fee, which covers the cost of evaluating a mortgage loan application.
How much are closing costs?
Typically, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. So, if your home cost $150,000, you might pay between $3,000 and $7,500 in closing costs. On average, buyers pay roughly $3,700 in closing fees, according to a recent survey.
Lenders are required by law to give you a Loan Estimate, which will include what the closing costs on your home will be, within three days of receiving your loan application. But these are just an estimate, and many of the fees listed can change.
At least three business days before your closing, the lender should give you Closing Disclosure statement, which outlines closing fees. Compare this to your Loan Estimate and ask the lender to explain what each line item on your closing costs is and why it is needed. Often, many of the fees that make up closing costs are negotiable, and some are completely unnecessary, especially things such as high administrative, mailing or courier costs charged by your lender. If the costs come in high, you can walk away from the loan; there are plenty of lenders who might be willing to offer you lower fees at closing.
How can home buyers avoid closing costs?
You can also avoid upfront fees by getting a no-closing cost mortgage, in which you don’t pay any of the closing costs when you close on the mortgage. Typically, when a lender offers a deal like this, it does end up costing you in the long run: The lender may charge you a higher interest rate on the loan for not paying closing costs, or the lender may wrap the closing fees into the total mortgage owed, in which case you end up paying interest on the closing costs. Finally, home buyers can negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees.