When you buy a home, in addition to your down payment, you need to budget for closing costs. Closing costs are the fees paid to third parties that help facilitate the sale of a home. The amount you’ll pay depends on several factors including the price of your home, your lender’s requirements, and the location of the property.
What costs to expect when closing on a mortgage
The type and amount of fees you’ll pay vary widely based on the lender you work with, the loan you choose, and your location. Here are some common fees to expect when closing on a home loan:
|Appraisal fee||Paid to a professional who gives the lender an estimate of the home’s market value.|
|Attorney fees||In some states, an attorney may be required to represent the interest of the buyer and/or lender. This fee is paid to the attorney to prepare and review all closing documents.|
|Credit report||Some lenders charge a fee for accessing your credit information.|
|Flood determination||Paid to a third party to determine whether the property is located in a flood zone. If your property is in a flood zone, your lender may require you to purchase flood insurance in addition to homeowners insurance.|
|Home warranty fees||If you choose to purchase a home warranty on the property, the annual premium may be included in your closing costs.|
|Homeowners association (HOA) fees||If your home is located within a homeowners association, the association may charge a fee to help pay for services and capital improvements. You may also need to prepay a portion of your annual dues at closing.|
|Homeowners insurance||The first year’s premium for your homeowner’s insurance is typically paid in full at closing.|
|Inspection fees||Paid to a home inspector to evaluate the home and tell you whether the property you want to buy is in good condition. You may also have a separate pest inspection to check for termites and other pest infestations.|
|Land survey||Your lender may require that a surveyor conduct a property survey.|
|Origination charges||Upfront charges from your lender for making the loan. This may include an application fee and underwriting fees.|
|Notary fees||The cost of having a licensed notary public certify that the persons named in the documents did, in fact, sign them.|
|Points||An upfront fee paid to the lender in exchange for a lower interest rate.|
|Prepaid interest||If you close on your loan in the middle of the month, your lender will collect interest on your loan from the closing date until the end of the month.|
|Private mortgage insurance premium||Depending on the type of loan you choose and how much money you put down, you may have to pay mortgage insurance – a policy that protects the lender against losses from loan defaults. Some lenders require an upfront premium, some collect it in monthly installments, and some do both.|
|Property taxes||Six months of property taxes are typically paid at closing.|
|Recording fees||State and local governments typically charge a fee to record your deed and other mortgage documents.|
|Real estate broker or agent fee||Fees paid to seller’s real estate broker for listing the property and to the buyer’s broker for bringing the buyer to the sale. The seller of the property typically pays these fees.|
|Title insurance||Provides protection if someone later sues and says they have a claim against your home, either from a previous owner’s delinquent property taxes or contractors were not paid for work done on the home before you purchased it.|
|Title search||A fee paid to the title company to search the public records of the property you are purchasing.|
|Transfer taxes||Taxes imposed by the state, county, or municipality on the transfer of property. They may also be called conveyance taxes, stamp taxes, or property transfer taxes.|
The amount you’ll pay depends largely on your location. A 2022 survey from ClosingCorp, a provider of residential real estate closing cost data, found that the national average closing costs totaled $4,876. That figure is based on closing cost data reported to more than 20,000 real estate service providers across the country. ClosingCorp compiled the average closing costs in each state, and based on the average purchase price in each state, average closing costs ranged from about 1% to about 4% of the purchase price. (The actual closing costs you pay could be higher or lower — a general rule of thumb says to expect paying about 2 to 7% of your home’s purchase price in closing costs.)
States with the highest average closing costs were:
- District of Columbia: $12,573 (2.01% of average purchase price)
- New York: $9,341 (2.60%)
- Delaware: $8,663 (3.36%)
- Maryland: $7,211 (2.28%)
But based on percentage of average purchase price, these states had the highest average closing costs:
- Pennsylvania: $6,633 (3.50%)
- Delaware: $8,663 (3.36%)
- Vermont: $6,839 (2.99%)
- New York: $9,341 (2.60%)
States with the lowest average closing costs were:
- Missouri: $2,905 (1.63%)
- Indiana: $2,934 (1.89%)
- South Dakota: $2,996 (1.48%)
- Iowa: $3,138 (1.70%)
And by percentage:
- Hawaii: $5,528 (0.84%)
- Colorado: $3,994 (1.09%)
- Massachusetts $4,273 (1.14%)
- California: $6,288 (1.20%)
In areas where home prices are high, closing costs will typically be high as well because many closing costs are calculated as a percentage of the home’s purchase price. In other areas, the ClosingCorp report pointed to high county transfer taxes as the principal reason certain areas have such closing costs.
Fortunately, there are steps to you can take to save on closing costs.
How to save on closing costs
Step 1: Choose your location
The location has a lot to do with the total closing costs you’ll pay. Factors that affect closing costs include:
- Home price. Since many costs are calculated as a percentage of the home’s purchase price, buying a less expensive home can lower your closing costs.
- Property taxes. You may have to prepay six months of property (or real estate) taxes at closing, so buying a home in a state with high-property tax rates can significantly impact your closing costs. The Tax Foundation publishes a list of the property tax rates by state. New Jersey is the highest with an effective tax rate of 2.11%, and Hawaii is the lowest at 0.28%.
- Laws and customs governing the closing process. Some states require an attorney to handle closings, resulting in higher legal fees at closing. In other states, closing costs are lower because closings are handled by a title or escrow company.
- Real estate transfer taxes. Transfer taxes are imposed by state and local government entities and can vary widely by locale. The National Conference of State Legislatures publishes a list of real estate transfer taxes by state. Some states, such as Alaska and Louisiana, have none as of 2017. In some localities in Colorado, the rates can be as high as 4%.
Ask your lender or real estate agent about closing costs in your area. If you’re not determined to live in a particular area, you could save thousands in closing costs by buying in a neighboring state or county.
Step 2: Shop around
A crucial step to saving on closing costs is to shop around. Home loans are available from many different types of lenders, and different lenders may quote you different rates and fees, even of the same type of loan. You should contact several lenders for quotes.
When you receive a quote, don’t just get the interest rate, APR, or monthly payment amount. The lender should provide you with a Loan Estimate that discloses the loan terms, amounts, interest rate, total monthly principal and interest, and whether the item can increase after closing. It also communicates which closing costs you can shop around for and which are fixed no matter which lender you choose.
Also, take a look at the homeowners insurance premium listed on Page 2 of the Loan Estimate. The lender will estimate an amount for the Loan Estimate, but your homeowner’s insurance premium is set by the insurance company, not the lender, and insurance rates can vary drastically by company. Comparison shopping for insurance can have a significant impact on your closing costs, as you’ll typically pay the first year’s premium at closing.
Step 3: Negotiate
Jeffrey Miller, co-founder of AE Home Group in Baltimore, Md., says knowing whether closing costs are negotiable or non-negotiable depends on whether or not they’re being charged for the mortgage company’s labor or to an outside service. “Line items like origination fee can be negotiated lower, whereas line items like the county recording fee are set by an outside third party and are non-negotiable,” Miller said.
Page 2 of your Loan Estimate will list the services you cannot shop for and the services you can shop for. The services you cannot shop for may be set by a government program or a third party rather than the lender. Your lender may provide you with a list of approved vendors for the services you can shop for.
Miller says in his experience, the line item with the most potential savings is the survey. “As a buyer, you have the right to select the survey company that is used,” Miller said. “We’ve seen this price range anywhere from $120 to $600. If this amount is on the high side, then it may be advisable to select a new survey company.”
Step 4: Ask the seller to pay closing costs
Many loans, including FHA loans, allow sellers to contribute a percentage of the sales price to the buyer as a closing costs credit. This is especially useful for buyers who are short on cash for the down payment and closing costs but can handle a slightly higher loan balance.
For instance, say the seller is asking $200,000 for the home. The buyer can offer $204,000 but asks the seller to cover up to two percent of the original asking price in closing costs ($200,000 x 2% = $4,000). The seller is able to get the same net profit on the sale, and the buyer reduces his closing costs by $4,000.
Keep in mind that lenders may have restrictions on how much the seller can credit to the buyer at closing. For instance, FHA loans limit the seller concession to 6% of the home’s sales price. There may also be restrictions on the types of closing costs that can be covered by the seller credit. For instance, they may restrict the seller credit to covering non-recurring items like the title insurance and loan origination fees.
Step 5: Time your closing
Part of your closing costs consists of prepaid interest charges for the time between your closing date and the end of the month. The earlier in the month you close, the more you’ll pay in prepaid interest. To reduce the amount you’ll need out of pocket, you can consider closing at the end of the month. The difference may be small, but if you’re really strapped for cash to close, this could help. However, timing your closing at the end of the month doesn’t actually save you any money in the long term. It just impacts the amount you’ll need to come up with at closing.
Step 6: Sign in person
Kevin Miller, Director of Growth with Open Listings, an online house-hunting service based in Los Angeles, says you may be able to reduce the costs you’ll pay at closing simply by asking your escrow company. “You should contact them at the beginning of the process to discuss the fees they charge you,” he said. “If you agree to use electronic documents and sign in-person, you may be able to avoid fees for a mobile notary, printing, and mailing.”
Should I get a no-closing cost mortgage?
While shopping around for a mortgage, you may have come across a “no-closing cost mortgage” and wondered if it’s the right deal for you.
A no-closing-cost mortgage is worth looking into, but “no closing costs” doesn’t actually mean you won’t have to come up with any cash for closing. Instead, it means that the lender doesn’t charge any lender fees. However, they may charge a higher interest rate to cover the costs of making the loan or add the closing costs to your loan amount.
Either way, you won’t need to come up with as much cash to close, but you’ll typically have a higher monthly payment.
Also, keep in mind that you may still have to pay costs at closing, such as title insurance and appraisal fees. Before you get locked into a no-closing-cost mortgage, ask the lender for a Loan Estimate and take a look at the interest rate, APR, monthly payment and the amount you’ll need at closing. Consider whether reducing the cash you need to close is worth paying more in the long run with a higher interest rate or larger loan amount.
The bottom line
When you’re in the market for a mortgage, it pays to shop around. Review your paperwork carefully. Ask your lender about any costs and fees you aren’t familiar with, or anything that changes from your Loan Estimate to the closing documents. Negotiating can be intimidating for many people, but your home is a big investment. The more you can save on closing costs, the more cash you’ll keep in your pocket for moving, buying furniture, and making your new place feel like home.
I am David, economist, originally from Britain, and studied in Germany and Canada. I am now living in the United States. I have a house in Ontario, but I actually never go. I wrote some books about sovereign debt, and mortgage loans. I am currently retired and dedicate most of my time to fishing. There were many topics in personal finances that have currently changed and other that I have never published before. So now in Business Finance, I found the opportunity to do so. Please let me know in the comments section which are your thoughts. Thank you and have a happy reading.