Congrats if you’ve saved for a down payment on a new place. That’s a huge chunk of change, but dig deeper, because closing costs average 2% to 5% of the loan principal.
Whether you are buying your first house or you’re a seasoned buyer, know what you’re in for at the closing table.
When you apply for a mortgage, each lender must provide a loan estimate within three business days. It will estimate closing costs, interest rate, and monthly payment.
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.
What Closing Costs Include
Closing costs range from fees charged by professionals like appraisers and title companies to lender fees and home warranty fees.
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 during the buying process.
Here are some of the closing costs a homebuyer should account for:
Lender fees. This is the cost the lender charges for processing your loan. In addition to the origination fee, you may have “bought down” your interest rate with one or more points. Each point costs 1% of your mortgage amount, and that money is due at closing.
Appraisal, inspection, and survey fees. It is easy to be wooed by pristine wood floors and a shiplap statement wall, but you and your lender want to make sure that your potential new home is actually worth the purchase price. This means paying professionals to double-check that there are no major issues with the house and to provide a current market value.
Settlement agent, lawyer, or escrow fees. It turns out that paperwork can be difficult and is easy to mess up, so a settlement agent or lawyer is typically required so that your lender can be sure everything is properly prepared and signed.
Title service. To make sure you’re buying property that actually belongs to the seller and that the property isn’t subject to any legal obligations, it’s necessary to do a title search. Your lender will likely require a lender’s title insurance policy for its protection. You may also want an owner’s title insurance policy to protect yourself. The buyer and seller often divide these costs.
Recording fees. When the title of the property is transferred from the seller to you, legal documents need to be recorded in the county records to make sure the property is correctly transferred into your name. County recorders typically charge fees for doing this.
Home warranty. A home warranty can be purchased to protect against major 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.
Private mortgage insurance. Often lenders require PMI if you make a down payment that is less than 20% of the purchase price. This is usually a fee that you pay monthly, but it can also be paid at the time of closing.
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.
Other Costs of Buying a Home
In addition to your down payment and closing costs, you also need to make sure that you can swing 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 homeowner’s insurance premium should be factored into your monthly ownership costs. 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.
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 80% 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.
Before buyers can close the door to their new home behind them and exhale, they must belly up to the closing table with 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.
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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.