Closing Costs: What They Are and What You Can Expect to Pay

What You Can Expect to Pay on Closing Day

Closing costs and fees are costs buyers and sellers pay to finalize the purchase or sale of a home.

Both buyers and sellers are typically responsible for paying some upfront costs in real estate transactions. The amount varies depending on factors including the home's purchase price and location, the type of mortgage used to purchase the home, and the buyer's choice of lender.

Since typical closing costs can add up to thousands of dollars, both buyers and sellers should understand and be prepared for this expense.

What Are Closing Costs?

Getting a mortgage is never free, and nor is transferring ownership of a house.

Buyers must pay for certain services, such as an appraisal and title insurance, that are necessary to get a loan and to do due diligence on the house. Buyers also have to pay the county to record the transfer of ownership, and (in some states) attorneys to make sure all the documents are legal and binding.

All of the money needed to approve and create a home loan is paid when the transaction closes and the buyer takes ownership—hence the term closing costs (and fees).

How much are closing costs? Typically, 2% to 5% of the value of the loan amount, but this can vary depending on things like the type of mortgage you choose, whether you are buying a home or refinancing, discount mortgage points, and lender policies. And who pays closing costs? Both buyers and sellers may cover some or all of these costs, depending on what the parties negotiate, and what the loan type allows.

Who Pays Closing Costs?

Most of the time, homebuyers are responsible for paying their closing costs and fees.

Sometimes, however, closing costs can be paid by the seller using seller concessions. For example, some sellers may be willing to help pay closing costs in return for a higher sale price on their house. The seller typically also pays both the buying and selling real estate agent's commissions and covers the cost of property taxes and any HOA fees for the time period they owned the home prior to the sale.

Local custom may also dictate that a seller usually covers some other costs, too. For example, in some Florida counties, it's common for the seller to cover title insurance costs even though the insurance protects the buyer and lender.

Common Closing Costs When Buying a House

Learning how to calculate closing costs can be tricky because these costs are based on the specifics of your transaction. Still, looking at typical closing costs gives you an idea of how much you'll be responsible for. Here are some common closing costs and fees when buying a house.

• Appraisal fee: Third-party appraisers charge an appraisal fee to visit the property and determine its fair market value. Appraisers determine how much a house is worth by comparing the home and its features to properties that were recently sold. Lenders use this information to approve how much a homebuyer can borrow.
• Attorney's fee: Attorneys sometimes collect a fee to review financial documents involved in a home sale, although not all states require an attorney. States that require an attorney at home closings include Connecticut, Delaware, Georgia, Massachusetts, Mississippi, New York, North Carolina, North Dakota, Oklahoma, Rhode Island, South Carolina, Vermont, and West Virginia.
• Credit report fee: Credit reporting agencies charge lenders to provide the buyer's credit report, which the lender reviews to determine if the buyer meets the requirements for a mortgage. Different mortgage options (FHA, VA, conventional) require different minimum credit scores to qualify.
• Home inspection fee: Licensed professionals charge a home inspection fee to visit the home and identify potential problems, such as mold or a broken air conditioner. Mortgages don’t require a home inspection, but it’s always recommended before making the financial commitment for the home.
• Mortgage broker fee: Mortgage brokers charge fees to help buyers find loans, although not all buyers work with a mortgage broker.
• Origination fee: Lenders often charge a fee to process the loan application.
• Pest inspection fee: Pest inspectors will come to the home to make sure there are no dangerous pests, such as termites, that could damage the property. Pest inspections are required for VA loans and FHA loans in areas with high termite populations.
• Points: Lenders often allow buyers to purchase mortgage points to buy down their interest rate. Points are essentially prepaid interest, and each point costs 1% of the loan amount and typically lowers the rate by 0.25%. Points can save buyers a lot of money if they plan to stay in the home for longer than a few years.
• Prepaid interest: Mortgage interest accrues between the settlement date and the end of the month in which the mortgage loan closes, so buyers have to cover this cost.
• Property insurance: Lenders require buyers to purchase home insurance up front when buying a home. Buyers often pay monthly towards premiums and the money is collected in an escrow account to make sure there's money to pay for coverage. Lenders may require a buyer to fund the escrow account at closing, as well as pay into it each month.
• Property taxes: Each county charges property taxes, and buyers will pay a pro-rated amount to cover the time during the year they own the home. Some loan options may require buyers to put some money into their escrow account up front to get ready to pay the next year's property taxes.
• Recording fee: Local governments typically charge a fee to record transactions in public records.
• Title search and insurance fees: A title company charges to conduct a title search, which involves reviewing past records and determining if there are any outstanding liens or other claims on the home. A title search is important to make sure the seller has a legitimate claim to the property and can transfer full ownership to the buyer. Lenders also require title insurance in case something was missed.
• Upfront Mortgage Insurance Premium: FHA loan requirements mandate that buyers pay an upfront mortgage insurance premium.
• Underwriting fee: Some lenders may charge an underwriting fee to cover the costs of loan processing and underwriting the loan application.
• VA Funding Fee: VA loans require buyers to pay a VA funding fee, although it is typically added to the loan balance and financed. This fee is used to finance the VA loan program. Disabled veterans (with a VA-recognized disability) and some others may be eligible for a VA funding fee waiver. Freedom Mortgage will help you determine if you can waive the VA funding fee, which can save you thousands of dollars when you buy a home.

Understanding closing costs and fees requires understanding how all of these different fees end up affecting the total amount you have to pay when you close on your home.

How Much Are Closing Costs?

Here's how much mortgage closing costs are in a typical transaction.

• Conventional loan closing costs: According to Fannie Mae, typically, closing costs are between 2% and 5% of the price of the home at closing with a conventional loan.
• FHA loan closing costs: According to the U.S. Department of Housing and Urban Development, FHA loan closing costs average between 2% and 6% of the purchase price of the home, according to Experian. FHA closing costs also require an upfront mortgage insurance premium equal to 1.75% of the base loan amount.
• VA loan closing costs: VA closing costs can range between 3% and 6% of the home's price, according to Experian. These closing costs typically include the VA funding fee, although this fee is often financed into the mortgage balance.

Closing costs can be paid up front or can be added onto the loan amount in some cases. Remember, adding closing costs to the loan balance means paying interest on them, which makes them more expensive over time.

Check out our closing costs calculator to estimate closing costs and fees you might pay when you buy a home.

Are Closing Costs Tax Deductible?

Some closing costs may be tax deductible. For example, you may be able to deduct the cost of prepaid property taxes, prepaid interest, and points from your taxes.

On the other hand, the cost of things like home appraisals, inspections, title insurance, and HOA fees are usually not tax deductible. Consult a tax advisor for information regarding the deductibility of interest and charges.

How Are Closing Costs Calculated?

It's actually pretty simple to understand how closing costs are calculated. Total closing costs on a house equal all of the different fees that a buyer or seller must pay, including some or all of the fees mentioned above.

Lenders will provide an estimate of these fees so that buyers and sellers can understand exactly how much money they are paying to get the mortgage and may need on closing day.

Ways To Lower Your Closing Costs

If you are buying a home, you may have options to lower your closing costs and fees. Here are some potential ways you could reduce what you pay up front.

• Closing cost assistance: Some states or counties offer programs or grants that help with the cost of closing on a home. These are often called homebuyer assistance programs and are very similar to down payment assistance programs. You can visit the Housing and Urban Development (HUD) website to learn more.
• Negotiate with the seller: A seller may be willing to cover some of your closing costs with seller concessions.
• Find out what services you can shop around for: Some closing costs are set in stone, such as the local government's recording fee. But there are others you can shop around for, such as home inspections and title services. When you have the option to choose a service provider, always compare prices to make sure you pay a reasonable cost.
• Compare mortgage lenders: Different lenders charge different amounts for things like origination and underwriting fees. Take this into account when deciding which lender to borrow from, but be sure you are making a full comparison and not basing your decision on one or two specific costs.

Final Thoughts on Closing Costs

Now you know the closing cost definition, how closing costs are calculated, average closing costs, and more. If you’re ready to move forward on a mortgage, Freedom Mortgage will give you a personalized estimate of these costs for your home and find the best loan option that saves you the most money.