What Are Closing Costs and How Much are They?
Closing costs are fees charged at the point that your home purchase completes. Officially, this is the moment that the deeds transfer from the seller to the buyer, at which point all technicalities have been finalized, the lender has done their bit, and the buyer has a new home.
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How Much are Closing Costs?
Homebuyers often forget about closing costs, failing to consider them when calculating how much money they need to save for the move. As discussed in our guide to The Real Costs of Moving Home, the down payment is typically the first—and sometimes only—thing on buyers’ minds, but closing costs can be very expensive as well.
These fees are typically charged as between 2% and 5% of the final purchase price. As an example, the average house price in the United States is around $230,000. On a sale like this, the closing costs would be between $4,600 and $11,500. This is huge when you consider that the average first-time buyer makes a down payment of just 7%, or around $16,000.
Generally, however, the costs are not that high, with a recent survey suggesting that the average buyer pays just under $4,000 in closing costs. However, once you consider all the other charges that go with moving home, and the fact that many young American households have less than that $4,000 in savings, it begins to sound like a monumental sum.
What are the Costs Charged Upon Closing?
The list of potential costs is huge. You may not be charged all these, but we have covered all possible fees below to give you an idea. Generally, closing costs are fees charged by the lender for the services rendered during the procurement of a loan, but you also need to cover the costs associated with legal and accounting services:
- Application Fees: Application fees are levied by the lender for the processing of your loan application. This fee covers the costs of pulling your credit report, checking your credit score, and analyzing your credit history, all basic things involved with all loan applications.
- Appraisal Fee: The lender needs to be sure that the home is worth what you’re paying for it and, more importantly, what they are lending you. They will send an expert to appraise the home and confirm the value.
- Attorney Fees: These fees are charged for the procurement of attorneys, who review the legal documents and make sure everything is as it should be.
- Courier Fees: You may be surprised to learn that you will also pay for the services of a courier to transport necessary documents between the parties involved with the sale.
- Discount Points: A discount point is 1% of the value of your loan and is paid to bring the cost of the loan down, reducing the balance and the interest. If you have some extra money, you should think about purchasing some additional discount points to improve your long-term prospects.
- Escrow Fee: A fee levied by the company responsible for overseeing the closing and initiating the payment transfers between buyer and seller.
- Home Inspection: An inspection typically takes place before a final agreement is made, so these costs won’t be paid upon closing. A home inspection gives the buyer a greater insight into the home, highlighting potentially costly repairs that the buyer can use to negotiate a reduced price.
- Homeowner’s Insurance: An insurance premium that covers the buyer in the event that something happens to their home, albeit with many exceptions. The first year’s insurance may be charged at the point of closing.
- Origination Fee: Charged by the lender to cover all admin costs, this fee is typically around 1% of the total value of the loan.
- Personal Mortgage Insurance: An insurance levied on conventional loans that have a down payment of less than 20%. In many cases, you will be asked to make a deposit that covers two months in advance.
- Prepaid Interest: You may be asked to prepay some of the interest on your loan, covering the amount that accrues between the point of closing and the date of your first mortgage payment.
- Property Taxes: As with Personal Mortgage Insurance, this is a monthly charge added to your mortgage payment, but you may also be asked for two months in advance upfront.
- Recording Fees: This is charged by your local recording office so they can make a record of the sale and the new owners.
- Title Search: A search is conducted to ensure that no one else has a rightful claim to the property, an important and relatively inexpensive part of the process.
- Underwriting Fee: Another fee charged by your lender, this time for the pleasure of underwriting the loan and determining if you are a good fit or not.
- Upfront Mortgage Insurance Premium: An insurance fee charged on FHA loans. This is charged at 1.75% of the total loan amount, although it can also be added to the balance of the loan.
Can You Avoid Paying Closing Costs?
Many of the closing costs charged by lenders can be negotiated. In most cases, you can reduce them simply by questioning specific fees and the reasons they are being charged. The application fee is a great example of this, as it’s not charged by all lenders.
There are lenders that skip some or most of these fees as well. This is something you should research in advance, checking how much your chosen lender charges and how much that will cost you when the loan closes.
Don’t simply focus on the down payment and the interest rate, and don’t forget about the costs that could accrue after you have secured the deeds, including the $500 to $1,000 you will need to pay a moving company, a fee that can climb to nearly $5,000 if you’re moving across the country.