How Much Will You Pay in Closing Costs
You found the perfect property, your loan is approved, it’s all over but the signing. Oh, and the closing costs. You don’t get the keys until the closing costs are paid.
The people who got you the loan don’t work for free. Closing costs include fees and commissions that accrued through the mortgage process. They add up quickly. The average closing cost is 2% to 5% of the loan. But how much you pay varies by the property’s location and cost of the home.
At the closing, you make your down payment via cashier’s check or wire transfer. The closing costs must be paid before you officially own the property. The fees range from loan processing to title insurance and pre-paid property taxes. Sometimes you can negotiate to reduce some of the costs. But there’s always going to be out-of-pocket expenses at closing, for the buyer and the seller.
Closing costs can be high. Some fees are negotiable, others are set in stone. If you want to reduce your closing costs, you need to know which is which.
Calculating Closing Costs
Lenders must provide a Loan Estimate within three days of receiving a mortgage application. The document provides an estimate of your closing costs. It’s not a definite number, but it’s rare for the estimate to be off by much.
The average closing cost is between 2% and 5% of the purchase price. For the most part, the higher the price of the house, the lower the closing costs. The closing costs on a $250,000 home lean 3% to 5% – between $7,500 and $12,500. That’s a hefty chunk of change.
Meanwhile, closing costs on a $950,000 home will run 2% or sometimes even at 1%. Those costs come out to $19,000 or $9,500. This is often due to a reduction in lender fees and realtor commissions.
Here’s a closing cost calculator so you can play with some numbers.
Does the Mortgage Matter?
The price of the property and the interest rate matter. Some of the fees you pay are percentages of the loan’s value.
If you can’t make the standard down payment (20 %), the closing costs will be higher. In addition to the loan, the lender may want multiple months of PMI (Private Mortgage Insurance) payments upfront. There are government programs for first-time homebuyers, with FHA loans and HUD grants.
Where you go for your mortgage can matter. Apparently, the fees for an FHA loan are different depending on the institution. (Call and compare between local banks, credit unions or mortgage brokers.)
Buying discount points adds money to the costs due at closing. Points can help reduce your interest over time. But they take a while to kick in. If you expect to stay in the house for the long term, they make sense. If not, its money you don’t need to spend.
Check the details
Three days before the closing you will get a Closing Disclosure form. The form has your final loan amount, interest rate, and closing costs. Check it carefully and ask any questions you have. Once it is signed, the mortgage packet is pulled together for the closing. You’re held to those terms.
There is a misconception that the buyer is the only one with closing costs. That’s not the case.
Closing costs apply to the buyer or the seller. During downturns in the housing market, sellers would offer to pay closing costs to close the deal. But that’s not the norm in a strong market.
Who pays what?
Selling your home tends to go one of two ways. It sits on the market for months before it sells or it’s snapped up in second. Either way, the seller needs to be prepared for the closing costs.
The biggest factor in selling a home is its location. The amount it will cost you to sell your home is very different in Wyoming than in New York.
Seller Closing Costs
These are some expenses the seller can expect:
- Realtor commission
- Transfer tax
- Prorated property taxes
- Credits toward closing costs (if any)
- Seller attorney fees
- Split escrow fees w/buyer
A transfer tax is a one-time fee charged by a state, county, or city to transfer the title to the new owner. There are 13 states with no transfer tax and 4 with minimal fees. States that have them take a percentage of the home’s value. The fee is higher in the northeast than the northwest. In Delaware, for example, a transfer tax can be as high as 4% of the purchase price. On a $200,000 home, that comes to $8,000. No cheap date.
The seller pays the buyer a pro-rated amount for property taxes. They may also credit money to the buyer for agreed-upon repairs or upgrades. These payments are put in escrow.
The takeaway for a seller? Investigate the transfer tax for your state. You can negotiate a realtor’s commission, but the transfer tax is absolute.
Buyer Closing Costs
The buyer assumes the majority of the closing costs. The numbers below will vary by location and should be considered ballpark figures. To simplify, the buyer pays almost all of the fees associated with securing the loan.
Here are some of the expenses that buyers should plan for:
- Loan-origination fee: 1% of the loan.
- Loan “discount” fee: 1% of loan per point
- Credit report: $150 (all 3 agencies)
- Title search: $350 – $600
- Title insurance: $1,000 -$2,500
- Lender’s attorney fees: $1000 – $3000
- Home inspection: $500-$1,000
- Filing/Recording fees: variable (based on local requirements)
- Escrow fees: $350-$1,000
- Pest Inspection: $100
- Prepaid taxes and homeowner insurance: $1,000-$4,500 (variable)
- Appraisal fee: $500-$1,000
- Survey fee: $350 to $500 (if applicable)
- Settlement fee: $350-$1,000
- Buyer’s attorney fees: $1,000 – $3,000 (if applicable)
A loan discount is about points. Points are bought upfront to reduce the mortgage rate. A buyer pays the lender 1% of the sale price upfront. The discount is in your mortgage rate over time. Buying a $250,000 home at a 4% interest rate, a single point saves you $12,800 on a 30-year term.
The home inspection fee is an evaluation of the property’s market rate and value. It’s a common component of the closing process. Depending on the property, lenders may require environmental inspections, such as soil contamination.
If the seller hasn’t done a pest inspection, get one. Your home is likely the biggest investment you’ve made to date. Protect it.
Lenders might require reserves to cover homeowner insurance or property taxes. Expect to pay at least 6 months of each. If you need Private Mortgage Insurance (PMI), add that to the list.
The settlement fee is paid to the third-party manager for the escrow account. The average settlement fee is $2 per $1000 of the sale price. If an attorney handles the escrow, you pay his/her fees instead. This cost is often split with the seller.
The takeaway for the buyer? Shop around for lenders. Ask direct questions about their fees and closing costs. Know how state or local laws will impact your closing costs. If you’re moving out of state, don’t assume the laws will be the same. Be strategic about buying points.
When you’re shopping lenders, be careful of hits on your credit. Opinions vary on whether pre-approvals or qualifications will ding your score. A soft pull on your credit shouldn’t hurt you.
FYI, most lenders will give you Loan Estimate form without a mortgage application. Makes it easier to comparison shop.
Ways to Reduce Your Closing Costs
The key to lowering your costs is to negotiate. The worst case is no one will budge. The best is you save a couple of grand. Take your shot.
The second page of the Loan Estimate has 2 lists: Services You Can and Cannot Shop. Anything you can shop means you can get your own quote. While it’s possible your lender has found the best deal, it’s worth the time to check.
Anything related to the title is the best place to find savings. Get multiple quotes. Ask your realtor about pest control companies and home inspections. Closing costs add up – so does knocking off a hundred bucks here and there.
Push Back on Lender Fees
Nobody loves a fee like financial service providers. Don’t let them nickel and dime you. Get an explanation of every mortgage fee – from the application form to the underwriting. If the costs aren’t itemized, ask them to break them out. Watch out for redundant services charges too.
Time the closing
Pro-rated daily interest charges are added to your account. They are pre-paid between the closing and first full month of home ownership. Set the date of your closing at the end of the month and you’ll pay less.
Research your discounts
Some lenders offer discounts based military service. Companies like USAA offer a suite of services targeted to military families. You might be eligible for financial assistance including discounts or rebates. Check with your employer as well. Some companies offer home buying assistance in their benefit package.
Ask the seller
The seller may be willing to help. It depends on the urgency of their situation. A job transfer or a family situation, a deadline always encourages cooperation. Remember the seller has their own closing costs, don’t push too hard. Keep it cordial and know when to let it go.
Closing cost assistance
Many moderate-income homeowners are unprepared to pay closing costs. Fortunately, there are grant programs to provide qualified individuals with closing costs. If the homeowner moves before or in year 4, they must replay the grant at 5% interest.
Just like there are discount points, there are rebate points. If you take a higher interest rate, your lender pays a rebate you can use for closing costs. The loan will need to be at least $200,000 to get a large enough rebate. Make sure you’re confident you can make the payments with the new rate.
If this is a temporary cash flow situation, put together a plan to refinance as soon as possible.
No Closing Cost Mortgage
There’s no such thing as “zero closing costs.” It’s just a question of how they get paid. This is another example of using a higher interest rate to avoid closing costs. The cost in the long term is high. If you expect to move within a 5-year period, it may not be as bad.
If you’re using your interest rate to cover your closing costs, it will cost you thousands of dollars over time.
Closing Costs Summary
Most people are dumbstruck by the cost of closing costs. The more house you want to buy, the more cash you’ll need to lay out. Don’t let that get lost. Right from the beginning, factor closing costs into the equation.
Always, always, always check the paperwork for pre-payment penalties. No-closing cost mortgages sometimes require buyers to stay for a certain amount of time. if you leave early, you need to pay back the closing costs.
Get a great realtor and a trustworthy lender. But don’t rely solely on them. Talk with friends and family about their home buying experiences. Ask questions and keep track of the answers. Do everything you can to reduce closing costs. But not at the expense of shoddy service.
Whether this is your first home or your last, be ready to pay your closing costs.
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