What You Need to Know About Closing Costs

When you’re planning to buy a house, you don’t just need upfront cash for a down payment as part of the transaction. It would be best to remember that you will have to pay closing costs. Closing costs are what you pay to a mortgage lender in exchange for the services related to your loan.

A big issue many less experienced home buyers face is that they don’t know how much they’ll have to pay in closing costs, or perhaps they don’t anticipate this expense at all.

Closing costs can also be described as processing fees that go to your lender in exchange for creating your loan. Closing costs can cover your home’s appraisal and title searches. The particular types of closing costs you’ll be responsible for paying vary depending on where you live and the type of loan.

You’ll have to pay these when you go to your closing meeting most of the time.

How Much Are Closing Costs?

Closing costs can be anywhere from 3% on the low end to 6% on the high end of the price of your home. If you get a mortgage for $200,000, for example, your closing costs might be $6,000 to $12,000.

Closing costs are not inclusive of your down payment.

You might be able to negotiate with a seller to pay some or all of your closing costs.

Both buyers and sellers will pay closing costs, but usually, the buyer pays the majority. If a seller does agree to cover some or all of the costs, it’s known as a seller concession.

If sellers agree to this concession, they can only contribute up to a certain percentage of the mortgage value, depending on the loan type, down payment, and occupancy.

In 2019, the average paid for closing costs in the U.S. was $5,749, including taxes.

The highest closing costs on average are in parts of the Northeast, including Washington D.C., Delaware, New York, Maryland, and Pennsylvania.

Washington State also has some of the highest closing costs in the nation.

States with the lowest average closing costs include Indiana, Montana, South Dakota, Iowa, and Kentucky.

Types of Fees

Your loan estimate and closing disclosure should have an itemized breakdown of all of the closing costs you’re going to be responsible for. Some of the items you might see include:

• A loan application fee, which is charged by your lender to process your application for a mortgage.
• Attorney fees cover the cost to have a real estate attorney prepare and review any contracts and agreements.
• Closing fees are also known as escrow fees and are paid to the party handling the closing.
• FHA loans require an upfront mortgage premium or UPMIP of 1.75% of the base amount of a loan to be paid at closing, or it can otherwise be rolled into your mortgage.
• If you buy a property that’s part of a homeowner’s association, you may have to pay a transfer fee that covers the costs of switching ownership
• A lender will typically require you to prepay your first year of homeowners insurance at the closing.
• An origination fee covers the administration costs of the lender to process your fee. The origination fee is usually 1% of your loan amount. If a lender doesn’t charge an origination fee, they’ll usually charge a higher interest rate.
• If you make a down payment of less than 20%, the mortgage lender may require you to have private mortgage insurance or PMI. You could have to make the first month’s payment for PMI at closing.
• During closing, you’ll pay any pro-rata property taxes that are due from the date you close to the end of the tax year.

These aren’t the only fees that are part of closing costs but are some of the major ones.

How to Lower Closing Costs

There are some closing costs you can’t do much about, but there are also things you can do to lower them somewhat.

One of the best ways to save on closing costs potentially is to shop around when you’re choosing a mortgage company to work with.

Choose a lender that offers the most competitive terms overall because closing costs won’t necessarily be the same across lenders.

Finally, you might also negotiate with the seller to have them contribute, especially if you’re in a buyer’s market.

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