Whether you are buying a home for the first time or the fifth time, one thing is for certain: You will have to cover an expense known as “closing costs” before you finally get the keys. Once you save up for a down payment, you still need to have enough money to cover these costs, which can be significant. Read on to get a better sense of how much you can expect to pay.
What are closing costs and how much are they?
Closing costs are made up of several different fees. While there is not one set amount that you can reference, this breakdown illustrates where the money is spent:
- Loan application: This fee varies from lender to lender. Some lenders charge as much as $500, while others charge much less or nothing at all.
- Home appraisal: Lenders hire third parties to determine the value of the home you’ll purchase. The amount you’ll pay depends on where you live and which company does the appraising. Nationwide, costs range from $200 to $700.
- Loan origination: These are costs associated with underwriting and loan processing. Loan origination fees are typically around 1% of the loan amount. If you take out a $300,000 loan, you can expect to pay $3,000 for this fee alone.
- Discount points: You can pay additional money to reduce your mortgage interest rate and save money over time. This fee is not mandatory. The amount of your interest rate drop depends on the lender. You may also have heard this fee referred to as mortgage points.
- Title search fee: This guarantees the seller has the right to sell their home. Fees typically range between $200 and $400, but the cost depends on where you live.
- Lender’s title insurance: This protects the lender in the event there is a dispute with your home’s title. Costs usually range between 0.5% and 1% of the loan amount.
- Owner's title insurance: Title insurance will financially protect you against any issue that may arise from an ownership dispute after you’ve purchased the property. Title insurance is often around 0.5% to 1% of the purchase price.
- Homeowners insurance: Lenders require homeowners to purchase home insurance. At closing, you’ll have to pay for a year’s worth of coverage. The amount you’ll pay depends on how much coverage you want. A good rule of thumb, however, is to expect to pay $50 a month for every $100,000 you spend on your home.
- HOA transfer fee: If you’re buying a home that’s in a homeowners association, this fee covers the costs of moving all fees from the seller to the buyer. However, you may not have to pay this fee because it’s often covered by the seller in their closing costs.
- Attorney fees: Some states require a real estate attorney to close on a house. The amount you’ll pay depends on where you live and which company you work with. Some attorneys charge by the hour while others have a set rate.
- Escrow funds: You may be required to put money aside for future homeowners insurance, mortgage insurance, and property taxes. The specific amount varies with each purchase and mortgage type.
- Title transfer tax and recording fee: Paid to your local government for the cost of transferring the title from the seller to the buyer. Cost varies depending on where you live.
There are also loan-specific fees you may have to pay depending on your mortgage:
- VA funding fee: If you are an active or retired military member, and you choose to buy your house with a VA loan, there is a VA funding fee. Because VA loans don't require mortgage insurance, the VA funding fee helps fund VA home loans. The amount of the fee depends on whether it’s your first time using a VA loan and the size of your down payment. You could pay between 1.25% and 2.15% of the loan amount.
- FHA mortgage insurance: FHA loans require a mortgage insurance premium to be paid at closing. The amount needed is 1.75% of the loan amount.
- Private mortgage insurance (PMI) for conventional loan: Make less than a 20% down payment, and you’ll need to pay PMI. Each lender charges a different amount, but $30 to $70 for every $100,000 of the loan amount is a standard range. Many lenders require a month’s worth of PMI at closing.
- USDA guarantee fee: Can be rolled into the loan or paid at closing and is essentially mortgage insurance for USDA loans. This amount is 1% of the loan amount.
So how much are closing costs? As you can see, the final amount will depend on a wide variety of factors.
How to pay for closing costs
Paying closing costs can be done a few different ways, but the options below are the most commonly accepted forms of payment:
- Cashier’s check: A cashier’s check is a check written by a bank to a designated party. Technically, the funds are drawn from the bank, which makes it more secure than a personal check.
- Wire transfer: A wire transfer is when funds are transferred electronically from one account to another. Depending on the bank, there may be a fee.
- Certified check: A certified check is like a cashier’s check, but with a certified check the account holder still writes a check directly to the recipient. The bank then takes the amount and sets it aside, guaranteeing that the funds are available for transfer to the payee once the check is deposited.
Closing costs vs. cash to close
While the two terms are similar, cash to close and closing costs are not synonymous.
Cash to close is the amount of money you need at closing to complete your home purchase. It includes your down payment, closing costs, and other expenses, such as homeowners insurance and property taxes.
Closing costs are part of the funds needed for cash to close but don’t encompass your down payment, which is often the biggest amount needed at closing.
Closing costs by loan type
Closing costs are largely impacted by your loan type. Here’s what you can expect to spend with each:
Paying closing costs FAQ
Who pays most of the closing costs?
Because of real estate agent commission fees, sellers typically pay more in closing costs, but the cost is taken out of the purchase price. Buyers, on the other hand, must have cash on hand to pay for their side of closing costs.
How much are closing costs for sellers?
Because a seller’s closing costs largely depend on real estate agent commission fees, the amount they pay will mostly revolve around how much they sell their home for.
How do you calculate closing costs?
Closing costs should not be a surprise because your lender is required to give you a closing disclosure, which lists every fee you’ll be responsible for. Typically, closing costs are 3% to 5% of the purchase price.
When do you pay closing costs?
Closing costs are paid during closing, which is the last step in buying a house. During closing, you’ll sign a number of documents, submit your down payment, pay closing costs, and receive the keys to your new home.
What is the largest closing cost?
The largest closing cost is often the loan origination fee, which is usually 1% of the loan amount. However, the largest fee can vary depending on your lender.
