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Closing Costs: What Are They, And How Much Will You Pay?
August 23, 2023 | Posted by: John C. Sheppard
Understanding Closing Costs: What They Are and What You'll Pay
When you buy a house, your down payment isn't the only money you'll need at the closing table. Closing costs are additional expenses, separate from the down payment, that you'll have to pay when you finalize the purchase. These costs include things like appraisal fees, legal fees, and money set aside in escrow.
Many people buying their first home don't realize how much they'll have to pay in closing costs. Some might not even know that there are ways to lower these costs.
Closing costs can be a bit confusing, so here's a guide to help you understand everything you need to know before you finish your loan. We'll also share some tips on how to reduce the amount you'll have to pay.
What Exactly Are Closing Costs?
Closing costs are fees you pay when you finalize your mortgage. They come up during the process of getting your loan and cover various fees, such as those related to appraising your home and checking the title. The exact closing costs you'll have to pay will depend on the kind of loan you get and where you live.
How Much Will Closing Costs Be?
Generally, closing costs are between 3% and 6% of the loan amount. So, if you're getting a mortgage for $200,000, you can expect closing costs to be around $6,000 to $12,000.
These costs are separate from your down payment, but you might be able to negotiate them. Just remember, your ability to negotiate will depend a lot on the housing market you're in.
Who Is Responsible for Paying Closing Costs?
Both the buyer and the seller have to pay closing costs, but usually, the buyer pays most of them. You can try to get the seller to help with closing costs as part of the deal, which can make buying the house more affordable.
Sellers have limits on how much they can contribute to closing costs. This contribution can only be a certain percentage of your mortgage value, and it varies based on the loan type, occupancy, and down payment. We'll explain more about this later.
How Much Will a Buyer Pay in Closing Costs?
Every buyer's closing costs will be different. Some costs are required by the lender, some by the government, and others depend on specific circumstances. Your location, lender, and loan type will affect how much you'll pay.
Before your closing meeting, your lender will give you a document called a Closing Disclosure. It will list all the closing costs you need to cover. Here's a breakdown of some common closing costs:
This fee, charged by some lenders to process your loan request, can be up to $500. It might be a separate fee or applied to other closing costs later.
A professional appraiser will assess your home's value to make sure you're not overpaying and that the property is ready to move into. Appraisal fees usually range from $300 to $600.
In some states, an attorney must be involved in closing a housing loan. These fees cover the attorney's work in coordinating your closing and preparing the title transfer paperwork.
This fee goes to the escrow company or attorney who handles your closing meeting. Costs vary by state and whether an attorney must be present.
Expect to pay around $30 for courier fees to transport mortgage documents, if your lender charges them.
Credit Reporting Fee
These fees, usually between $10 and $100, cover the cost of checking your credit report and score.
You can pay money upfront to reduce your interest rate by buying discount points. One point equals 1% of your loan amount.
Also known as reserve fees or prepaids, these funds are held by your lender to pay for property taxes, insurance premiums, and mortgage insurance. You might need to put a few months' worth of expenses into an escrow account at closing.
FHA Mortgage Insurance
With an FHA loan, you'll pay a mortgage insurance premium upfront. The current rate is 1.75% of your base loan amount.
If you're buying a house in a flood zone, you'll likely pay $15 – $25 for flood certification.
Homeowners Association Transfer Fee
This fee covers the cost of transferring HOA fees from the seller to the buyer and ensures the seller is current on their HOA dues.
This insurance protects you if your home gets damaged. Many lenders require you to pay a year's worth of homeowners insurance at closing.
Loan Origination Fee
Expect to pay about 1% of your loan's value for the cost of processing and underwriting your loan.
Lender's Title Insurance
This one-time payment protects the lender from loss if you lose your home to a title claim.
Lead-Based Paint Inspection
If the home was built before 1979, you might need to pay around $300 for a lead-based paint inspection.
Owner's Title Insurance
This optional insurance covers you if a previous owner brings a lawsuit against you after you buy the property.
Pest Inspection Fee
Some states require a pest inspection before closing. The average cost is about $100.
Prepaid Daily Interest Charges
You might have to pay upfront for any interest that accrues on your loan between closing and your first mortgage payment.
Private Mortgage Insurance (PMI)
If you put down less than 20% on a conventional loan, you'll need to pay PMI. The amount depends on your lender.
Your lender might require you to pay up to a year's worth of property tax dues at closing.
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