How Much are Closing Costs?

Buying a home comes with a lot of fees. Before you move in, you must face “closing day,” the process of signing documents that transfer ownership from the seller to you. This includes paying closing costs, the fees you owe to third parties for their role in finalizing the real estate transaction. 

What Are Typical Closing Costs?  

In general, fees range from 2 to 6% of the home’s purchase price. This makes it easy to calculate your closing costs. If you buy a $250,000 house, expect to pay anywhere from $5,000 to $15,000 at closing. The loan type and lender you choose can affect these costs, so pay close attention before finalizing your mortgage. 

What’s Included in Closing Costs? 

You may be wondering — if you’re already making a down payment and paying interest on a mortgage loan for the next few decades, why must you also pay closing costs? The fact is real estate transactions are complex and involve many different parties, so fees add up fast. Here are some of the typical expenses you can expect to pay at closing. 

• Documentation and processing fees owed to your lender cover the cost of loan origination, processing, underwriting, and closing your mortgage. 
• A survey fee is required to check property lines and confirm boundaries. 
• A flood determination fee covers the cost to establish if your home is in a flood zone. 
• Inspection fees may apply if you hire an inspector to search forlead-based paint, mold growth, pest damage, and other hazards. 
• A property appraisal fee pays a company to assess the home’s fair market value to determine your loan-to-value ratio. 
• A recording fee pays to process public land records at the city or county recorder’s office. 
• An attorney fee may apply if you hire a professional to prepare and review your home purchase contracts. 
• A title search fee covers the cost of analyzing public property records for ownership discrepancies. 
• Title insurance protects the lender and owner if an ownership dispute or lien arises that wasn’t found in a title search. 
• A Homeowners’ Association transfer fee covers the cost of switching ownership and joining an HOA. 
• Discount points are an optional, upfront payment to the lender that reduces your mortgage interest rate. 
• Prepaid daily interest charges cover pro-rata interest that accrues from the closing date until the date of your first mortgage payment. 
• Pro-rata property taxes from the date of closing to the end of the year are due at closing. 
• You owe the first months’ private mortgage insurance premium at closing if you put less than 20% down. 
• Some lenders require an escrow deposit of two months’ worth of property taxes and mortgage insurance. 
• The first year’s homeowner’s insurance premiums are due at closing. 
• FHA loans require an upfront mortgage insurance premium of 1.75% of the base loan amount. 
• If you have a VA loan, a VA funding fee is charged to help offset taxpayer costs. 
• Sellers usually pay real estate agent commissions, often amounting to 5 or 6% of the gross purchase price. 

How to Reduce Closing Costs 

As you start saving for a down payment, you’ll want to set aside enough cash to pay closing costs as well. Thankfully, it’s possible to reduce these costs if you take the proper steps. 

• Shop around: If you get pre-approved for a mortgage, your lender will send you a loan estimate, which includes projected closing costs and other loan details. Consider getting pre-approved by multiple lenders so you can compare all the costs and terms before making your final decision. 
• Talk to your lender: Go over your loan estimate with a fine-tooth comb. If you don’t understand some of the fees, ask the lender to clarify. Likewise, if you notice new fees or see noticeable increases on your closing disclosure form, bring up these discrepancies with your lender. It’s normal for small fluctuations to occur between the loan estimate and the closing disclosure form, but significant increases could impact your ability to close. 
• Schedule closing day for the end of the month: If you don’t mind waiting, this tactic can help cut down on prepaid daily interest charges due at closing.  
• Negotiate with the seller: Wondering who pays closing costs? Both buyers and sellers are subject to various fees, but buyers usually pay the largest share. Still, it may be possible to persuade the seller to take on more closing costs, especially in a buyer’s market or if the seller is urgent about finalizing the deal. 
• Deduct closing costs from your taxes: Examples of tax-deductible closing costs include origination fees, discount points, private mortgage insurance, FHA mortgage insurance, and VA funding fees. You may choose to deduct these in the year they were paid, deduct them over the life of the loan, or add them to your basis when you sell the home. Since everyone’s situation is different, consult with a tax professional for specific guidance. 
• Negotiate loan-specific fees with your lender: Documentation and processing fees are not set in stone, but you’ll need to ask about them individually. Speak up if you feel you’re being overcharged. 
• Roll closing costs into your mortgage loan: Sometimes, lenders offer to absorb the closing costs into your loan. This is an option to decrease your expenses upfront, but it could result in a higher interest rate, as well as having to pay interest on your closing costs.