What Are Closing Costs When Buying a House?

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Jan 22, 2024

When most people begin thinking about financing the purchase of a house, they tend to focus on how much of a mortgage they can hope to secure and what kind of down payment they’ll be able to make.

While those two factors are definitely very important, there’s a third type that you can’t afford to ignore if you’re serious about buying a home: closing costs.

What Are Closing Costs for a Homebuyer?

Closing costs are all the payments you need to make before you can actually close on a house. Like down payments, they’re paid on the day of closing. On average, buyer closing costs are typically 2% -3% of the home’s final sales price. Keep in mind that this does not include your down payment.

The exact amount your closing costs will be as the buyer will depend on a variety of different factors. However, if you take the average home price of $354,000 a multiply it by 2.3% (the median closing cost %), you’d be on the hook for $7,788 in closing costs.

Breakdown of Closing Costs When Buying a Home

After you officially complete a mortgage loan application, the lender is required by law to provide you with a loan estimate, which reveals the exact closing cost numbers.

Among other things, this estimate must include an approximation of what the closing costs will total. Otherwise, you could go through the entire process of buying a house only to get blindsided during the very last step and have to rethink your entire budget. So, while it’s just an estimate, it’s usually a fairly reliable one.

Still, before applying for a mortgage, it’s helpful to get a better sense for what fees your closing costs may entail. For most buyers, the fees included in their closing costs are below:

1. Lender Fees

Depending on your lender, they’ll either charge you a single origination fee for your mortgage or list them out in individual amounts like:

  • Administrative and Processing Fees
  • Appraisal Costs
  • Courier Fees
  • Credit Check Fee
  • Flood Certification
  • Transfer Taxes

In some cases, it may also make sense to request discount points from your lender, which would lower your interest rate but would also need to be paid as a closing cost.

2. Title Insurance

Before you take over title of a house, you want to be sure that no one will be able to challenge your ownership later on.

This is why you want to pay for title insurance during closing. The insurance company will do rigorous research to ensure your claim to the house will never be successfully challenged once you close. If you’re taking out a loan, you’ll also be required to buy the lender a title insurance policy for similar reasons. They, too, want peace of mind knowing that their borrower will never be stripped of their collateral.

Title fees will probably represent a large amount of your total closing costs as the buyer, so be sure to shop around. Avoid choosing the same title company the seller used when they purchased the home, as they’re unlikely to find anything they may have missed last time.

3. Attorney or Title Company Fees

Third party closing agents are always involved in the purchase of a home, each of which will charge a fee for their services. Some examples of these fees include:

  • Settlement Fee
  • Abstract of Title or Title Search Fee
  • Attorney Fee

Fortunately, these fees tend to be fairly low, from $20 up to $300 or $400 for your appraisal. Again, your lender’s initial estimate should incorporate them.

4. Taxes & HOA Dues

Finally, being a homeowner comes with new financial obligations. The most common examples of these new types of fees are:

  • Escrow Account Fees
  • Homeowners Association Dues
  • Homeowners Insurance
  • Property Taxes
  • Transfer Tax or Doc Stamps

Although these fees are usually assessed annually, they are often charged monthly or quarterly with the money then being held in escrow.

Who Pays the Closing Costs?

The answer is that both parties have closing costs they are responsible for paying. We just covered the buyer’s side. Meanwhile, the seller’s closing costs mostly included real estate commission.

However, the party that actually pays for can also be decided during negotiations. For example, if the market favors you, as the buyer, the seller may be open to providing a monetary seller concession that covers some of those aforementioned buyer closing fees as a way to make the purchase more attractive.

If your closing costs are overwhelming, you could also ask the seller to raise the purchase price of the home in exchange for help with some of those fees. They might be open to adding the amount you need to the price, because it ensures they won’t lose the sale or their profit margin.

Understanding Additional Closing Costs

When navigating the closing process of buying a house, it’s crucial to understand the variety of fees involved beyond the initial price tag. Among these, the upfront mortgage insurance premium safeguards the lender in case of default, while the lender’s title insurance protects against any title disputes. The origination fee, typically a percentage of the loan amount, compensates the lender for processing the new loan.

As you approach the closing date, be prepared for the underwriting fee, which covers the cost of evaluating your loan application. Additionally, a credit report fee is charged to assess your creditworthiness. To cover closing costs effectively, potential homeowners should also budget for title insurance costs, ensuring protection against any legal issues with the property title. The involvement of a real estate attorney can further secure the transaction, providing legal oversight and advice. Understanding these bottom line closing costs is essential for a smooth and informed home-buying experience.

How to Reduce Closing Costs as a Buyer

Aside from house-hunting for good deals during a buyer’s market, the best ways to keep your closing costs down are to work with an experienced real estate agent who knows how to handle negotiations. In addition, SimpleShowing, the author of this article provides a Buyer Refund which can reduce your closing costs by $5,000 on average.

For many buyers, that would be enough to cover most – if not all – of their closing costs.

Contact us today to learn all about how we help buyers like you connect with agents and keep costs down.

Final Thoughts

Understanding mortgage closing costs is crucial for any homebuyer ready to make their dream of homeownership a reality. These costs, which can include loan origination fees, appraisal fees, and underwriting fees, are an essential part of the home buying process. A loan estimate provided early in your journey will detail these expenses, giving you a clearer picture of how much you’ll need to budget for. It’s also important to consider recurring costs like property tax and private mortgage insurance, which can affect your monthly payments.

When asking yourself, “How much are closing costs?” remember that the average closing costs can vary significantly based on your loan amount and location. These expenses often include upfront mortgage insurance premiums, especially if your down payment is less than 20%, and may also cover a portion of your property taxes and private mortgage insurance for the first year.

Knowledge of these costs allows you to accurately plan and save, ensuring you can comfortably pay closing costs without compromising your financial stability. Always review your loan estimate carefully to understand every charge and feel empowered to ask your lender questions to clarify any uncertainties. This careful preparation will pave the way for a smooth transition into homeownership, with no surprises when it’s time to close.

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