Closing costs average 2% to 5% of your mortgage loan principal. So even if you’ve saved for a down payment on a new place, you are likely going to have to dig somewhat deeper to afford to seal the deal. How deep, you ask? For buyers, closing costs can add up to a significant sum.
Whether you are a first-time homebuyer or a seasoned property purchaser, it’s wise to know what to expect, in terms of both money and process, when it’s time to gather at the closing table. Payments will be due from both the buyer and the seller.
Get ready to delve into this important home-buying topic and learn:
• What are closing costs?
• How much are closing costs on a house?
• Who pays closing costs?
• How much are closing costs for the buyer and the seller?
• How can you lower closing costs?
What Are Closing Costs?
Closing costs are the fees needed to pay the professionals and businesses involved in securing a new home. These range from fees charged by appraisers, real estate agents, and title companies, to lender and home warranty fees.
Here are some key points to know:
• When you apply for a mortgage loan, each lender must provide a loan estimate within three business days. This will give you information such as closing costs, interest rate, and monthly payment. Review those closing costs carefully.
• Your closing costs will depend on the sale price of the home, the fees the chosen lender charges, the type of loan and property, and your credit score.
• Closing costs are traditionally divided between the buyer and seller, so you won’t necessarily be on the hook for the whole bill. That said, the exact division between buyer and seller will depend on your individual circumstances and can even be a point of negotiation when you make an offer on a house.
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prequalify for a SoFi mortgage loan,
with as little as 3% down.
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How Much Are Closing Costs?
As noted above, average closing costs on a house typically range from 2% to 5% of the mortgage principal. Let’s say you take out a $300,000 mortgage loan to buy a house with an agreed-upon sale price of $350,000. Your closing costs could be between $6,000 and $15,000, or 2% and 5%.
Be aware that a “no closing cost mortgage” often means a higher rate and a lot more interest paid over the life of the loan. The lender will pay for many of the initial closing costs and fees but charge a higher interest rate.
Good news if you are buying a HUD home: HUD will pay some of the closing costs as well as the real estate commission fee usually paid by the seller.
Recommended: First-Time Homebuyer Guide
Calculate Closing Costs
The tool below is a home affordability calculator, and it’s a great way to also see what the potential closing costs and additional monthly costs would be based on how much home you can afford.
Who Pays Closing Costs?
Typically, closing costs are paid by both the buyer and the seller. Each has their own responsibilities to uphold.
Some fees are specific to the purchase and are payable by the buyer. These include title search, prepaid interest on the mortgage loan, and more.
Other costs are the seller’s responsibility: paying the real estate agent and so forth. Read on to learn more about who pays for what when closing on a home sale.
How Much Are Closing Costs for a Buyer?
Typically, the buyer pays the following closing costs:
• Abstract and recording fees: These fees relate to summarizing the title search (more on that below) and then filing deeds and documentation with the local department of public records. You may find that abstract fees can cost anywhere from $200 to $1,000, and recording fees in the range of $125.
• Application fee: Your lender may charge you to process your application for a mortgage loan. This could cost up to $500.
• Appraisal and survey fees: It is easy to be wooed by pristine wood floors and dining room walls covered in vintage wallpaper, but surface good looks will only get you so far. You and your lender want to make sure that your potential new home is actually worth the purchase price. This means paying professionals to delve more deeply and provide a current market value. These home appraisal and survey fees are typically due at closing. This is usually in the $300 to $600 range, but could be considerably higher, depending on the home, its location, and other factors.
• Attorney costs: Working with a real estate attorney to review and vet documents may be an hourly rate (typically $150 to $500 per hour) or a project fee (such as $750 or $1,500). The specifics will vary depending on the individual professional you use, your location, and how complex your purchase is.
• Credit reporting, underwriting, and origination fees: The lender may charge anywhere from $10 to $100 per applicant to check their credit score; underwriting fees (often in the $300 to $750 range) may also be added to closing costs. Origination fees can be about 0.5% to 1% of your loan’s value and cover the costs of the lender creating your loan documents.
• Flood certification fee: The lender may require a flood certification, which states the flood zone status of the property. This could cost anywhere from $170 to $2,000, depending on your state.
• Home inspection fee: This will likely cost between $187 and $510, but it could go higher. This is paid by the buyer, who is commissioning the work to learn about the home’s condition. In some cases, it may be paid at the time of service rather than at closing.
• Homeowners insurance: Your lender may require you to take out homeowners insurance. The first payment may be due at closing. The exact amount will depend on your home value and other specifics of your policy.
• Home warranty: A home warranty is optional and can be purchased to protect against major mechanical problems. A warranty plan may be offered by the seller as part of the deal, or a buyer can purchase one from a private company. Your lender, however, will not require a home warranty.
• Mortgage points: Each mortgage point you choose to buy costs 1% of your mortgage amount and typically lowers your mortgage rate by 0.25% per point. That point money you are paying upfront is due at closing. All the mortgage fees will be spelled out in the mortgage note at the closing.
• Prepaid interest: Some interest on your mortgage is probably going to accrue between your closing date and when the first payment is due on your loan. That will vary with your principal and interest rate, but will be due at closing.
• Private mortgage insurance: Often lenders require PMI if you make a down payment that is less than 20% of the purchase price. Putting less money down can make a buyer look less reliable when it comes to repaying debt in the eyes of lenders. They require this premium to protect themselves. This is usually a fee that you pay monthly, but the first year’s premium can also be paid at the time of closing. Expect a full year to cost between .5% and 2% of the original loan amount. Expect to pay between $3o and $70 a month for every $100,000 you are borrowing.
• Title search and title insurance fees: When a title search is done to see if there are any other claims on the property in question, the buyer typically pays the fee, which is usually in the $75 to $200 range. The lender often requires title insurance as a protection. This is likely a one-time fee that costs between 0.1% and 2% of the sale price. If your house costs $400,000, the title insurance could be between $4,000 and $8,000.
As you see, some of these fees will vary greatly depending on your specific situation, but they do add up. You’ll want to be sure to estimate how much closing costs are for a buyer and then budget for them before you head to your closing.
Recommended: How Long Does It Take to Close on a House
How Much Are Closing Costs for a Seller?
You may also wonder what closing costs are if you are selling your home. Here are some of the fees you are likely liable for at closing:
• Real estate agent commission: Typically, the seller pays the agent a percentage of the sale price of the home at closing, often out of the proceeds from the sale. The commission is likely to be in the 3% to 6% range, and may be equally split between the buyer’s and seller’s agents.
• Homeowners association fees: If the home being sold is in a location with a homeowners association (HOA), any unpaid fees must be taken care of by the seller at closing. The actual cost will depend upon the home being sold and the HOA’s charges.
• Property taxes: The seller must keep these fees current at closing and not leave the buyer with any unpaid charges. These charges will vary depending on the property and location.
• Title fees: The seller will probably pay for the costs associated with transferring the title for the property.
It’s important for sellers to anticipate these costs in order to know just how much they will walk away with after selling a home.
How to Reduce Closing Costs
Closing costs can certainly add up. Here are some ways to potentially lower your costs.
• Shop around. Compare lenders not just on the basis of interest rates but also the fees they charge. Not every mortgage lender will charge, say, an application, rate lock, loan processing, and underwriting fee. See where you can get a competitive rate and avoid excess fees.
• Schedule your closing for the end of the month. This can lower your prepaid interest charges.
• Seek help from your seller. You might be able to get the seller to pay some of your closing costs if they are motivated to push the deal through. For instance, if the property has sat for a while, they might be open to covering some fees to nudge the sale along.
• Transfer some costs into your mortgage payments. You may be able to roll some costs into the mortgage loan. But beware: You’ll be raising your principal and interest payments, and might even get stuck with a higher interest rate. Proceed with caution.
Other Costs of Buying a Home
In addition to your down payment and closing costs, you also need to make sure that you can afford the full monthly costs of your new home. That means figuring out not only your monthly mortgage payment but all the ancillary costs that go along with it.
Understanding and preparing for these costs can help ensure that you are in sound financial shape for your first few years of homeownership:
Principal and interest. Your principal and interest payment is the amount that you are paying on your home loan. This can be estimated by plugging your sales price, down payment, and interest rate into a mortgage calculator. This number is likely to be the biggest monthly expense of homeownership.
Insurance. Your homeowners insurance cost should be factored into your monthly ownership expenses. Your insurance agent can provide you with details on what this policy will cover.
Property taxes. Property tax rates vary throughout the country. The rates are typically set by the local taxing authorities and may include county and city taxes. It’s important to factor in these costs as you think about your ongoing home-related expenses.
Private mortgage insurance. As mentioned, PMI may be required with a down payment of less than 20%. PMI is usually required until you have at least 20% equity in your home based on your original loan terms.
Homeowners association fees. If you live in a condo or planned community, you may also be responsible for a monthly homeowners association fee for upkeep in the common areas in your community.
Of course, these are just some of the things to budget for after buying a home. Your needs will depend on whether you are moving a long distance, whether you have owned a home before, and other factors. It’s a lot to think about, but it’s an exciting time.
The Takeaway
Before buyers can close the door to their new home behind them and exhale, they must be able to afford their down payment, qualify for a mortgage loan, and pay the closing costs — usually 2% to 5% of the loan amount. A home loan hunter may want to compare estimated closing costs in addition to rates when choosing a lender. It can be a smart way to keep expenses down.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
How can I estimate closing costs?
Typically, closing costs will cost between 2% and 5% of your home loan’s amount.
When do I pay closing costs?
Your closing costs are typically paid at your closing. That is when you take ownership of the property and when your home mortgage officially begins.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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