When it comes to buying a home, most people are aware that they need to budget for a down payment on their mortgage. However, a down payment isn’t the only upfront cost you’ll have to fork over — you’ll also need to pay closing costs.
To make sure you have enough cash to close the deal, use our closing costs calculator to estimate how much you might need to pay. With this estimate in mind, you can factor these costs into your budget and plan to save enough money to buy the house of your dreams.
What Are Closing Costs?
Simply put, closing costs are the various expenses that come with purchasing a home. These expenses are charged by your lender and title company for the following services they provide during the home buying process:
- Originating your mortgage/home loan.
- Transferring the property from seller to buyer.
Typically, about three business days after applying for a loan, your lender will send you a Loan Estimate, which is a standardized form detailing your itemized costs.
A Closing Disclosure itemizes each cost and is a finalized version of the Loan Estimate. Your lender is obligated to provide a Closing Disclosure at least three business days before closing. This form is the most accurate representation of how much you’ll pay in closing costs before you actually close.
How Much Are Closing Costs?
As closing costs are made up of a variety of fees incurred during the home buying process, they vary based on a number of factors like your lender and location.
Realtor.com estimates that closing costs range anywhere from two to seven percent of your home loan amount. This means that if you have a $300,000 mortgage, your closing costs could fall between $6,000 to $21,000.
In 2021, ClosingCorp found that the average amount of closing costs paid for a single-family home totaled $6,905 including transfer taxes. This is a 13% increase from the national average closing costs year over year.
Who Pays Closing Costs?
Both buyers and sellers usually have closing costs to pay, but it’s possible to negotiate this based on the market. In a seller’s market where there are more buyers than homes, it’s not likely that a seller will agree to pay for your closing costs.
However, in a buyer’s market where there are more homes than buyers, a seller may offer closing cost credits to make their deal more enticing. This is known as a seller concession.
Typical Closing Costs to Look Out For
Your total amount of closing costs depends on a variety of expenses during the closing process. To help you get an idea of what to look for, we’ve listed some typical closing expenses below.
- Appraisal fee: An appraisal fee is the cost of hiring a professional appraiser to determine the value of the house. According to FIXR, it costs an average of $400 to appraise a single family home.
- Credit check fee: Before determining whether you’re eligible for a loan, lenders typically check your financial history to assess your creditworthiness or how reliable you’ll be at repaying it. It typically costs lenders less than $30 to run a credit check.
- Land survey fee: A land surveyor charges this fee to verify your property’s boundaries. It helps lenders confirm that your financing is accurate and costs an average of $524.
- Loan origination fee: This is an application fee that your lender charges for the service of creating and processing your home loan. The cost generally ranges from 0.5% to 1% of your loan.
- Mortgage points: Also known as discount points, you’ll buy these to reduce the interest rate on your mortgage. One point is equal to 1% of the loan amount.
- Lender’s title insurance and/or owner’s title insurance:
- Lender’s title insurance protects the lender from title damages not found by the title company and is typically a requirement for most mortgage companies.
- Owner’s title insurance protects the owner from claims against the property, but is usually optional. Most people tend to bundle the two policies and the fee costs 0.5% to 1% of the purchase price.
This is by no means an exhaustive list of closing costs, so it’s always best to check the Loan Estimate or Closing Disclosure your lender provides you for an itemized list of actual expenses.
How To Reduce Closing Costs: 4 Tips To Try
Although it may seem like the expenses just keep piling up when you’re about to close on a home, it’s important to know that there are a few things you can do to help reduce your costs. Use the following tips and tricks to save money at the closing table.
1. Compare Lenders
Your lender majorly influences closing costs, so it’s important to pick one that works for you. Contact different mortgage lenders and ask what fees and interest rates they typically charge.
Some lenders may even send a Loan Estimate form before you apply for a loan, all you have to do is supply a few bits of information Typically, lenders send this form about three days after you apply for a loan, but it’s worthwhile to see which companies offer to do it beforehand. Then you can compare forms and choose the company that’s best for you.
2. Shop Around For Services
Just like you’d shop around for a car or new appliances, it’s important to compare vendors for all the different services you need when buying a home. Ask for price quotes from vendors like attorneys and land surveyors, so you can choose the most affordable option for you.
3. Find a Mortgage Discount or Grant
Another hack for saving money on your closing costs is to look into mortgage discounts or grants from specific banks. For example, Bank of America offers discounts on mortgage fees for Preferred Rewards members or up to $7,500 in closing credits to eligible applicants. Ask your bank or lender what discounts they can offer you.
4. Negotiate with Your Lender
Before you sign on the dotted line, remember to negotiate closing costs with your lender. Not all costs are negotiable, but charges like title insurance and some third-party services like attorney services are areas that you may find big savings.
Read your itemized Loan Estimate and Closing Disclosure carefully. Additionally, if you see several itemized charges from your lender that have vague descriptions like “delivery fee,” don’t be afraid to ask what they are and challenge them. The best case scenario is that your lender removes the charge and you save money.
Closing Costs FAQs
With closing costs eating up a sizable chunk of your home budget, it’s natural to have more questions. Check out the answers to a couple common questions about closing expenses below.
Can Closing Costs Be Rolled Into a Mortgage?
Paying a down payment upfront is already a big blow to your bank account, so you may be wondering if you can roll your closing costs into your mortgage. While this may be possible through some lenders, not all lenders allow it.
Additionally, if you roll your closing costs into your mortgage, you’ll be responsible for paying interest on it as long as you have the loan. Over time, it may be likely that you pay more in interest than if you opted to pay your closing costs upfront.
What is a No-Closing-Cost Mortgage?
A no-closing-cost mortgage means that the lender pays for closing costs upfront but charges a higher interest rate on your loan. This type of mortgage may help you pay less upfront, but you’re also likely to pay more to the lender over time in interest.
Can Sellers Pay Closing Costs?
Sellers may opt to pay closing costs to make a deal more attractive to buyers. However, this usually happens in a buyer’s market, when inventory outnumbers buyers, giving them a bargaining advantage.
At the beginning of 2022, housing markets across the nation were experiencing historically low inventories. In fact, a recent report found that the U.S. is nearly four million homes short of meeting national housing needs.
While you may ask your seller if they’d be willing to pay for closing costs, it’s wise to keep your expectations realistic in a seller’s market.
No one wants to be unprepared at the closing table. Use our free closing costs calculator to help you estimate your expenses and feel prepared to close on your dream home. Don’t forget to use this estimate to adjust your housing budget in the Mint app to help you reach your financial goals.
8 Types Of Mortgages For All Home Buyers