When saving up to buy a home, most people focus entirely on the down payment. You might have saved 20% for the down payment, thinking you are fully prepared. But then, a few days before you get the keys, your lender hands you a document showing you need to bring thousands of dollars more to the closing table.
These are called closing costs, and they are a critical part of the home-buying process. Failing to plan for them can derail your purchase. Here is everything you need to know about them.
What Are Closing Costs?
Closing costs are fees charged by lenders, title companies, and third parties for services required to finalize your mortgage and transfer ownership of the property. They are paid at the "closing" — the final meeting where the home officially becomes yours.
How Much Are They?
According to standard industry estimates, closing costs typically range from 2% to 5% of the purchase price.
For example, if you are buying a $300,000 home, you should expect to pay between $6,000 and $15,000 in closing costs. This is in addition to your down payment!
What is Included in Closing Costs?
Closing costs are made up of many different individual fees. Here are the most common ones:
Lender Fees:
- Origination Fee: What the lender charges to process your loan.
- Appraisal Fee: Paid to an independent appraiser to verify the home's value.
- Credit Report Fee: The cost of pulling your credit score.
Third-Party Fees:
- Title Search and Insurance: Ensures the seller actually owns the home and no one else has a claim to it.
- Escrow Deposit: Money held in advance to pay for future property taxes and homeowners insurance.
- Recording Fees: Paid to the local government to officially record the new ownership.
Who Pays Closing Costs?
Traditionally, the buyer pays the majority of the closing costs. However, in some markets, it is common to negotiate for the seller to cover a portion of the costs (known as "seller concessions"). This is often used as a bargaining chip if a home has been on the market for a while.
How to Reduce Closing Costs
While you cannot eliminate closing costs entirely, you can try to reduce them:
- Shop Around: Compare Loan Estimates from at least 3 different lenders. Fees like the origination fee can vary significantly.
- Negotiate with the Seller: Ask the seller to pay for a portion of the closing costs in exchange for a slightly higher purchase price.
- Ask Your Lender: Sometimes lenders offer "no-closing-cost" mortgages, which waive upfront fees in exchange for a slightly higher interest rate.
Conclusion
Closing costs are an unavoidable part of buying a home. The key is preparation. When using our mortgage calculator to figure out your budget, always make sure you have a separate savings fund strictly for closing costs and moving expenses.