Your down payment isn’t your only upfront cost when buying a home. You’ll also need to pay closing costs, which are fees that come with taking out a home loan and transferring ownership of the house. Closing costs typically range from 2% to 5% of your mortgage amount, but they can vary depending on your lender, mortgage type, and other factors. Understanding how much closing costs are on a home can help you prepare and avoid financial surprises on closing day.
Table of Contents
- Key Points
- • Closing costs typically range from 2% to 5% of the mortgage loan amount and include fees for the lender and services related to the home purchase.
- • Both buyers and sellers pay closing costs, though the types of fees differ; buyers cover mortgage-related fees, while sellers often pay transfer taxes.
- • For a $450,000 mortgage, closing costs could be between $9,000 and $22,500, but they can be lower (1% to 3% of the price) if buying a home with cash.
- • Closing costs are composed of individual fees like loan origination, appraisal, title insurance, escrow, and prepaid property taxes and insurance.
- • Buyers can reduce closing costs by shopping around for lenders and service providers, negotiating with the mortgage provider, asking for seller concessions, or exploring assistance programs.
What Are Closing Costs?
Closing costs are fees you’ll have to pay on closing day, as you finalize the purchase of a home. They cover costs that go into funding a mortgage and transferring ownership of the house from seller to buyer.
Some lender fees include origination, application, and underwriting fees. You might also pay for an appraisal, title services, and escrow deposit, as well as prepay some property taxes and homeowners insurance premiums.
Both buyers and sellers pay closing costs. While many of the fees for buyers are mortgage-related, the fees for sellers can include agent commissions, attorney fees, and transfer taxes.
How Much Are Closing Costs on a Home Purchase?
The average cost of closing a home is often 2% to 5% of your loan amount. If you’re taking out a mortgage for $450,000, for example, expect to pay closing costs around $9,000 to $22,500. Your specific costs will vary depending on the lender you choose and the type of mortgage loan you choose. For instance, FHA loans and VA loans come with their own specific upfront fees.
If you’re purchasing a house with cash and not taking out a mortgage, you’ll still have to pay closing costs. What is the percentage of closing costs in this scenario? Expect to pay about 1% to 3% of the purchase price. For a home purchase of $450,000, for example, you might pay $4,500 to $13,500.
You may be able to lower closing costs by shopping around for certain services, like title search and insurance services. Negotiating with your lender or getting seller concessions can also bring costs down.
Closing Cost Breakdown
Closing costs refer to a number of individual fees related to your mortgage and home purchase. Here are common closing cost line items that you’ll encounter.
Loan Origination Fee
Along with meeting mortgage loan requirements, you may have to pay an origination fee to take out a mortgage. This fee covers the cost of processing and underwriting your mortgage. It typically adds up to 0.5% to 1% of your total loan amount. Some lenders don’t charge an origination fees, but may charge higher interest rates to offset this.
Appraisal Fee
Is appraisal part of closing costs? Yes, your lender will request a home appraisal to find out the property’s current value, since the lender can’t loan you more than a property is worth. If your offer exceeds the value, you’ll have to see if the seller will adjust the price or pay the rest in cash. Rescinding your offer is also a possibility if you have an appraisal contingency. Expect the appraisal fee to cost around $300 to $600.
Title Insurance
Title insurance protects you and your lender if issues arrive over the home’s ownership, such as liens or unpaid taxes. Lenders require a lender’s title insurance policy, which may cost 0.1% to 1% of your mortgage. You can also elect to purchase owner’s title insurance.
Escrow Fee
You’ll pay escrow fees to a third party, such as an escrow company or real estate attorney, to manage funds and documents during the real estate transaction. They may cost 1% to 2% of the home purchase price but can vary by location and the escrow company you use.
Attorney Fee (Where Applicable)
Some states require that you hire a real estate attorney to handle closing and review all your documents. And some buyers hire an attorney even if it’s not required.
Home Inspection Fee
A home inspection can identify issues with the property before you buy it. An inspector will check out the home’s foundation, plumbing, electrical, and other systems and look for anything that needs repairs. Inspection fees may cost around $300 to $425.
Recording Fee
Your local government charges this fee to document your property purchase and update local records. It may cost around $125.
Prepaid Property Taxes and Insurance
You may have to pay some of your property taxes and homeowners insurance premiums upfront at closing, as well as private mortgage insurance (PMI) if your down payment was less than 20%. These funds will go into an escrow account, and your lender will draw from the account to pay those bills on your behalf.
Mortgage Points (If Applicable)
You may have the option to purchase mortgage points at closing in exchange for reduced mortgage rates. One point usually brings your rate down by 0.25 percentage points and costs about 1% of your loan amount. If you have cash on hand, buying mortgage points may save you money if you plan to stay in the house for a long time.
Improving your credit profile could also help you qualify for a better interest rate. The average credit score to buy a house was over 700 at last count.
Buyer vs. Seller Closing Costs
Both buyers and sellers have to pay closing costs, but the fees they pay differ. Buyers typically cover lender, appraisal, and inspection fees, along with prepaying taxes and insurance. Sellers usually pay transfer taxes and may also pay some or all of the commission for the real estate agent(s) involved in the transaction.
In the case of a private home sale directly between a buyer and seller, sellers don’t have to pay real estate agent commissions. In this case, how much closing costs are on a private home sale can be significantly less for sellers.
How to Estimate Closing Costs
Closing costs generally add up to 2% to 5% of your loan amount. It can be tough to estimate a precise figure upfront, since there are so many fees that go into the amount.
After you’ve gotten mortgage preapproval and picked a lender, you can ask for a loan estimate that will outline your fees and charges. You can also use online closing cost calculator tools to estimate your costs.
Lenders are required to send you a document called a Closing Disclosure at least three business days before closing day. This document will contain all your final loan terms and closing costs.
How to Reduce Closing Costs
While you can’t avoid closing costs completely, you can take steps to reduce them, such as:
• Ask for seller concessions: A seller may agree to cover some closing costs in certain circumstances, such as when the seller needs to part with the property quickly.
• Shop around with lenders: Fees vary among lenders, so shop around to find a mortgage with low closing costs and a competitive interest rate. Comparing home loans from multiple lenders could save you thousands of dollars over the life of your mortgage.
• Negotiate with your mortgage provider: Once you’ve chosen a lender, you could try asking if the company can reduce or waive any fees.
• Research different service providers: There are some closing costs you can shop around for, such as title services and real estate attorneys.
• Explore closing cost assistance programs: There are government and nonprofit down payment and closing cost assistance programs that provide grants to help buyers cover closing costs. These are often available to first-time homebuyers or low-income buyers.
The Takeaway
With the average cost of closing on a home running 2% to 5% of the loan amount, closing costs can add thousands of dollars to your upfront expenses when you buy a home. While you can’t avoid them completely, you may be able to reduce your costs by shopping around for lenders and services, negotiating seller concessions, and exploring homebuyer assistance programs. By understanding how much closing costs on a home purchase are, you can plan your budget in advance and avoid surprises on closing day.
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FAQ
Do closing costs include the down payment?
Closing costs don’t typically include the down payment you make when purchasing a house. Closing costs are separate fees buyers must pay to take out a mortgage and finalize a real estate transaction, such as loan origination fees, appraisal fees, and title insurance fees.
Can closing costs be rolled into the mortgage?
You may have the option of rolling the cost of closing on a house into the mortgage so you can spread them out over time instead of paying them upfront. This approach can increase your total loan amount and long-term costs.
Are closing costs tax deductible?
Most closing costs are not tax deductible. However, you can deduct some costs, like mortgage points and upfront property taxes, for the year you purchased the home. You can also write off your mortgage interest and local property taxes if you itemize your return. Consult a tax advisor for intel on your specific circumstances.
What if I can’t afford closing costs?
If you can’t afford the cost of closing on a house, you might try negotiating for seller concessions or asking your lender to reduce or waive some fees. Shopping around with lenders or for some services could also help you reduce costs. Other options include rolling closing costs into your mortgage, applying for closing cost assistance grants, or taking more time to save before you buy a home.
Can I use gift funds for closing costs?
You can use gift funds for closing costs as long as you follow lender rules and provide all the required documentation. For instance, the gift funds must come from an approved donor, such as a relative, and be accompanied by a gift letter signed by the donor.
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