What are closing costs? | Find the best loan for you
Whether it’s your first time home buying or home refinancing, closing costs are an additional expense that you need to prepare for early in the mortgage application process.
Closing costs include a variety of expenses that are above the purchase price of your property. This includes things like lender fees, title insurance, government processing fees, prepayments, and home insurance. You may need to use your down payment to cover the closing costs by increasing your monthly mortgage payment, providing cash on closing, or receiving less than expected refinancing.
Some of these costs, like collecting or transferring taxes, are inevitable. Others, like your lender’s fee, can be negotiated. Find out more about the closing costs and how the costs are divided.
What are typical closing costs?
The closing costs are around 2 to 5% of the home purchase price, depending on the loan amount and local taxes and fees. For example, if you buy a home worth $ 300,000, the total cost of closing could be anywhere from $ 6,000 to $ 15,000.
According to a report from data firm ClosingCorp, the national average for the cost of closing a single family home in 2020 was $ 6,087 including tax. Refinancing fees tend to be lower – the 2020 average was $ 3,398 including tax, according to ClosingCorp’s refinancing report. This is mainly because payments like transfer taxes, land appraisals, and some inspections are not required with refinancing.
Within three days of submitting the required mortgage application documents to your lender, you will receive a loan estimate that includes the estimated closing costs as well as the interest rate and expected monthly mortgage payment.
“This gives you a first-hand look at what it’s all about,” says Cecilia Isaac, chief lending officer at OneUnited Bank. “If you get a loan estimate and you don’t understand something, go over it with the lender.”
You will receive a closing notice three days before your scheduled closing, a document that contains the final details of your loan and closing costs.
What is included in the closing costs?
Closing costs can differ in several ways. The biggest difference is between the closing costs for buying a house and the closing costs for refinancing. You will have a variety of expenses when purchasing – from a home inspection to a land survey – that you probably won’t need when refinancing. You will also see differences in the amounts that states and municipalities charge for property transfers when you buy a home. Finally, subscription fees can vary as some lenders may offer large discounts in a highly competitive market.
The closing costs can be divided into three general categories:
- Typical upfront costs. These can be part of any mortgage process, whether you’re buying a new home or refinancing. For example, a lender will almost always try to cover some of its processing costs with a subscription or issue fee. Credit checks are standard for any credit check, and the lender often requires ratings for every mortgage takeover.
- Usual prepaid closing costs. When mortgage applicants buy or refinance a home, they often open an escrow account with the lender to pay property taxes and home insurance. However, the lender needs enough money in escrow to make these payments and it could require thousands of dollars upfront, especially if a tax payment is due within a few months. Buyers may also be required to pay a homeowners association fee upfront.
- Closing costs for purchase only. When buying a new home there are several expenses associated with getting a mortgage, including payments to professionals who helped with the purchase, such as real estate agents and lawyers; and municipal taxes, such as a transfer tax.
Here’s a look at each of the closing costs in detail:
Development costs. These are also known as underwriting fees and are charged by the lender as compensation for mortgage processing. “It’s a flat fee that we charge based on the significant amount we pay during the transaction,” said Tom Parrish, director of product management for retail lending at BMO Harris Bank. “We have a lot of people involved from start to finish.” That fee could run to around $ 1,000, Parrish says.
Registration fees. A lender may charge an upfront application fee that would cover the lender in the event that underwriting begins and an assessment is made but the loan does not complete. However, in a competitive credit market, some lenders may drastically cut or remove lender fees. “You should shop around because lenders vary,” says Isaac. “Some do not charge any formation fees. Some do not charge review fees. Some say there are no lender closing costs, so anything that is a lender fee is paid for by the lender. “
Credit check and monitoring. A lender may charge about $ 20 to $ 30 or more for an initial credit check and credit watch during the application process, Parrish says.
Evaluate the blocking fees. Some lenders charge a fee to fix your initial interest rate or when you need to extend it due to application delays.
Title-related costs. A title search and insurance that covers the lender up to the amount owed is usually required to protect both the lender and the mortgage applicant. Property insurance provides protection if someone claims ownership of your home or has not been paid to work on the property and has a lien on it. Property insurance could protect you if the previous owners haven’t paid taxes on the property. Although lenders receive competitive title insurance market prices, “the customer can always build and search title insurance if they want a lower price,” says Parrish.
Appreciation. A home appraisal is an objective appraisal of the value of a property by a professional appraiser who typically visits the home. The cost is typically a few hundred dollars or more and is paid upon completion.
Property taxes. In some states, the seller is required to fund a portion of that year’s tax bill when it closes. In addition, the buyer would be expected to add funds to the escrow account in anticipation of the next tax payment.
Homeowner insurance. A buyer must purchase home insurance prior to purchase and prepay costs on the date of purchase. To reduce these costs, find the best home contents insurance deal. “Take the time to consider coverage levels and deductibles that can affect the cost of your insurance premiums,” says Parrish.
Private mortgage insurance. If your down payment is less than 20% of the purchase price of the house, you will need to get private mortgage insurance. Payment for the first month is included in your closing costs to ensure your home is covered from the day you pick up the keys.
Refinancing costs. If you are refinancing with a different lender or credit service provider than the one currently holding the mortgage, you may need to prepay into a new escrow account while receiving a refund for the amount available from the current account.
HOA fees. If you’re moving to an area managed by a homeowners association, such as condos and townhouses, or an enclosed, single-family neighborhood, you may have to pay the initial fees as part of your closing costs.
Steer. State, and possibly local, governments may impose a tax on the transfer of ownership from one landowner to another and the recording of this document. Your real estate agent should be able to detail the types of government fees that are charged in the area in which you plan to buy a home.
Survey fees. A lender may require the mortgage applicant to pay for a professional inspection of the property to be purchased.
Inspection fees. It is common for a buyer to commission a home inspection before buying a home. The cost of the inspection is often paid before or at the time of the inspection, which is usually weeks before closing. There are also specific inspections that home buyers can get: a pest inspection (usually for termites), a lead paint inspection, a radon inspection, or an asbestos inspection.
Real Estate Agent Fees. The seller usually bears all brokerage fees that cover both the seller’s and buyer’s brokers, unless prior agreements have been made in the sales contract.
Legal fees. Required or not, many homebuyers will be represented by a real estate attorney during – and possibly before – the closure and would likely pay fees in the event of the closure.
Mortgage points. Discount points are an option if you want to prepay a lower interest rate during the life of your loan. One mortgage discount point equals 1% of the loan amount. You can consult with your lender to discuss the pros and cons of paying rebate points, but it only makes sense if you have enough cash to cover the additional closing costs. You can also choose negative mortgage points. In that case, if you agreed to a higher interest rate, you’d get a loan to offset the closing costs, Parrish says.
Who pays the closing costs?
Buyers and sellers can negotiate a portion of the closing costs, but sellers are usually responsible for brokerage fees and buyers bear the credit-related costs. Real estate transaction costs can be borne by either side, depending on government requirements and traditional expectations in a particular area.
In some cases, a buyer receives a credit for closing costs from the seller. For example, if the purchase price is $ 250,000 and the buyer receives a closing expense credit of $ 5,000, the buyer pays the seller only $ 245,000.
“There are transactions where this works and is fine for both the seller and the buyer,” says Isaac.
Potential first-time home buyers who may have difficulty paying the closing costs in addition to a down payment should check out various programs that can help. If they can reduce the amount of down payment required, the closing costs could be easier to bear.
“These down payment support programs can be critical to them,” says Isaac. “It helps them get into this house because they have that added benefit. Each of these aid programs help many clients, whether they are low- to middle-income borrowers or local residents.”