What Are Closing Costs?
Buyers and sellers incur closing costs in addition to the purchase price of the property to finalize a real estate transaction.
These expenses may consist of loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report fees. The lender is required by law to provide an estimate of these costs within three days of receiving a mortgage application. Gifts of equity (real estate sales to a relative or close friend at a price below market value) may incur closing costs as well.
• Closing costs are additional fees due at the closing of a real estate transaction beyond the purchase price of the property. Both the buyer and seller may incur closing costs.
•Fees associated with the origination and underwriting of a mortgage, real estate commissions, taxes, insurance, and record filing are examples of typical closing costs.
• Closing costs must be disclosed to buyers and sellers by law and agreed upon prior to the closing of a real estate transaction.
How Much Are Closing Costs?
When the title of a property is transferred from the seller to the buyer, closing costs are incurred. The total amount of closing costs can vary based on the property's location and value. Typically, homebuyers pay between 2 and 5 percent of the purchase price in closing costs.
According to a survey conducted by ClosingCorp, a data firm that specialises in these costs, the national average closing costs for a single-family home in 2020 were $6,087 including taxes and $3,470 excluding taxes.
The following locations had the highest average closing costs, including taxes, according to the survey:
Washington, D.C. ($29,329), Delaware ($17,727), New York ($13,261),
Maryland ($11,709) is more expensive than Washington ($11,513).
Missouri ($1,571) was the state with the lowest average closing costs, including taxes.
Indiana ($2,100), Kentucky ($2,229),Iowa ($2,272) and South Dakota ($2,276)
Laws require lenders to provide a loan estimate that details the transaction's closing costs. The federal Real Estate Settlement Procedures Act (RESPA) requires that lenders provide this information within three days of receiving a loan application from a borrower. At least three days prior to the closing, the lender must also provide a statement detailing all closing costs. The fees listed may differ from the loan estimate.
What Do Closing Costs Include?
On the loan estimate and closing disclosure, all closing expenses will be itemized. Here are the typical fees you can expect to encounter:
Application fee
This is a fee assessed by the lender in order to process your mortgage application. Before submitting a mortgage application, you should inquire with the lender for specifics.
Attorney fee
This is the fee a real estate attorney charges for preparing and reviewing home purchase contracts and agreements. Some states do not require attorneys for real estate transactions.
Closing fee
This fee, also known as an escrow fee, is paid to the party that handles the closing, which, depending on state law, may be the title company, escrow company, or an attorney.
Courier fee
When you sign paper documents, this fee helps expedite their delivery. If the closing is digitally handled, you may not be required to pay this fee.
Credit report fee
A lender's fee (between $15 and $30) for pulling your credit report from the three major credit bureaus. Some lenders may waive this fee if they receive a discount from the credit reporting agencies.
Escrow deposit
Some lenders require two months' worth of property tax and mortgage insurance payments to be deposited into an escrow account at closing.
FHA mortgage insurance premium
FHA loans require the payment of an upfront mortgage insurance premium (UPMIP) of 1.75 percent of the loan amount at closing (or it can be rolled into your mortgage). There is also a monthly annual MIP payment that can range from 0.45% to 1.05%, depending on the loan's term and principal balance.
Flood determination and monitoring fee
This is the cost associated with hiring a certified flood inspector. The inspector's responsibility is to determine if the property is located in a flood zone and requires flood insurance (separate from your homeowners insurance policy). A portion of the fee covers the ongoing monitoring of the property's flood status.
Homeowner association transfer fee
If you purchase a condominium, townhouse, or property in a planned development, you may be required to join the homeowner association of that community (HOA). This fee covers the costs associated with transferring ownership, such as updating documents. It may not be specified in the contract whether the seller or buyer pays the fee, so you should verify this in advance. The seller must provide evidence of the amount of HOA dues, as well as copies of the HOA's financial statements, notices, and minutes.
Homeowners insurance
A lender typically requires proof that you have paid the first year's premium for homeowners insurance at closing.
Lead-based paint inspection
This fee is paid to a certified inspector in order to determine whether or not the property contains lead-based paint.
Lender's title insurance
A one-time, upfront fee paid to the title company protects the lender in the event of an ownership dispute or lien that was not discovered during the title search.
Origination fee
This fee covers the administrative costs incurred by the lender to process your mortgage and is typically 1 percent of the loan amount. Some lenders waive origination fees but charge a higher interest rate to cover the costs.
Owner's title insurance
This policy protects you in the event that your home's ownership is contested. It is typically optional, but legal professionals strongly recommend it.
Pest inspection
This fee covers the cost of a professional inspection for pests such as termites, dry rot, and similar damage. Certain states and government-insured loans mandate an inspection.
Points
Points (or discount points) are an optional, up-front payment to the lender that reduces your loan's interest rate and, consequently, your monthly payment. One point is equal to the one percent of the loan amount. When mortgage interest rates are already low, paying points may not result in significant savings.
Prepaid daily interest charges
A payment to cover the interest on your mortgage from the date of closing until the date of your first payment.
Private mortgage insurance (PMI)
If your down payment is less than twenty percent, your lender may require you to obtain private mortgage insurance (PMI). Additionally, you may be required to pay the first month's PMI premium at closing.
Property appraisal fee
This is a fee that must be paid to a professional property appraisal company in order to determine the home's fair market value and loan-to-value (LTV) ratio.
Property tax
Expect to pay any local property taxes that are due within 60 days of the closing date.
Rate lock fee
This is an optional fee charged by the lender for guaranteeing a specific interest rate for a limited time, typically from the time of preapproval until closing. A rate lock safeguards you against an unexpected increase in interest rates.
Recording fee
This is a fee charged for the recording of public land records by your local recording office, typically a city or county office.
Survey fee
This is the fee charged by a surveying company to confirm a property's property lines and shared fences.
Tax monitoring and tax status research fees
These are fees charged by a third party to monitor your property tax payments and alert your lender of any issues, such as late or failed payments.
Title search fee
Title search fees are charges levied by the title company for the examination of public property records. The title company verifies that there are no outstanding ownership disputes or liens on the property by searching these records.
Transfer tax
This is a tax imposed by the state or local government to facilitate the transfer of ownership from the seller to the buyer.
Underwriting fee
The lender charges an underwriting fee for verifying your financial information, income, employment, and credit history prior to final loan approval.
Veterans Affairs funding fee
This fee, charged as a percentage of the total loan amount, helps offset the program's costs to U.S. taxpayers if you have a VA Loan. The fee is based on your military service classification and loan amount; it can be paid at closing or financed into the mortgage. Certain members of the military are exempt from paying the fee.
Real estate commissions are one of the most expensive aspects of a typical closing. However, sellers pay this fee, not buyers. Typically, the commission is between 5% and 6% of the home's purchase price, and it is divided equally between the seller's agent and the buyer's agent.
Can You Negotiate Closing Costs?
You may wonder how you will be able to afford all of these fees in addition to the down payment, moving expenses, and home repairs. Some of them may be negotiable, thankfully.
Speak up, for instance, if you suspect that a lender is adding unnecessary fees, also known as "junk fees." Request that the lender eliminate or reduce duplicate fees if you observe them. Pay particular attention to excessive processing and documentation fees.
If you are working with an attorney, he or she should be able to identify any fees that are unnecessary or excessively high.
Other Ways to Reduce Closing Costs
Shop around
You may be able to save a substantial amount of money on closing costs if you compare lender fees. You are also not required to use the title company, pest inspector, or home insurance company that your lender recommends. Therefore, it is prudent to call around to compare prices.
Plan your closing for the last day of the month
A closing date near or at the end of the month reduces daily interest charges on prepayments. A lender can run this scenario to determine how much you could potentially save.
Ask the seller for help
You may be able to convince the seller to either reduce the purchase price or cover a portion (or, with luck, all) of your closing costs. This is more likely if the seller is motivated and the house has been on the market for an extended period of time with few offers. In many hot housing markets, however, conditions favour sellers, so you may encounter resistance or an outright refusal. However, just ask.
Compare the loan estimation and closing disclosure forms
When you receive your initial loan estimate, thoroughly review it. If you are uncertain about what a fee entails or why you must pay it, you should ask the lender for clarification. Consider it a red flag if a lender cannot explain a fee or pushes back when questioned about it.
Similarly, if you notice new fees or significant increases in certain closing costs, ask your lender to explain the specifics. It is common for closing costs to fluctuate between preapproval and closing, but large increases or unexpected additions warrant investigation.
Include closing costs in your mortgage payment
In some cases, lenders will pay your closing costs or roll them into your loan. When you finance your closing costs into your mortgage, your monthly payment will increase.
Real estate commissions
At the conclusion of a real estate transaction, sellers owe their broker a commission. When they list their home for sale, sellers might be able to negotiate this fee.
Special Considerations: Mortgages With No Closing Costs
No-closing-cost mortgages eliminate most, but not all, buyer closing costs. If you are short on cash, these mortgages can be helpful in the short term, but they typically come with higher interest rates. Your lender may also offer to roll your closing costs into your mortgage, but doing so will increase your loan balance and require you to pay interest on those costs over time.