So you found your dream home, put in a bid, fended off the competition, went to the negotiating table, and settled on a firm, exact price. That final purchase price is what you’re going to end up paying, right?
Well, not exactly. Once you settle on the home price, there are closing costs to take into account; typically, closing costs add 3-5% on top of the purchase price. For a home that sells at the U.S. median home value of just under $260,000, that’s as much as $13,000— in addition to what you’re paying for the house. (Sellers have to pay closing costs too, the largest of which is the real estate commission, which is typically 6%.)
So what, exactly, make up closing costs? And more importantly, how do you reduce those closing costs? Let’s answer both of those questions, in detail, right now.
Table of Contents
- Typical Closing Costs
- Mortgage Closing Costs
- Seller Closing Costs
- How to Reduce Closing Costs
- How to Estimate Your Closing Costs
Typical Closing Costs
For buyers, closing costs are usually 3-5% of the final purchase price. They can vary widely, though, depending on where you are, and which lender you’re using.
A report from April 2020, compiled by ClosingCorp, an analyst of real estate closing cost data, shows just how much closing costs vary, state by state. More surprisingly, the averages at the high and low end of the spectrum don’t seem to have much to do with home price.
The five states with the most expensive closing costs are:
|State||Avg. Home Sale Price||Avg. Closing Costs||% of Home Price|
|District of Columbia||$645,108||$25,800||4.00%|
As you can see from this chart, there isn’t a huge correlation between closing costs and home price. Yes, buyers in DC are hit with high home prices and high closings costs (as % of sale price), but when you go down the list, there are few patterns. Delaware has a much lower average home price than New York or Washington, but higher closing costs.
Now let’s look at the five states with the lowest closing costs:
|State||Avg. Home Sale Price||Avg. Closing Costs||% of Home Price|
The remarkable thing about this chart is just how low closing costs in these states are, compared to the top five; Missouri’s average home sale price is 70% of Delaware’s but closing costs in Missouri are less than a sixth of Delaware’s average. And in terms of raw percentage of sale price, Indiana is a little over a fifth of Delaware’s percentage. If there’s a takeaway here, it’s that how much closing costs you end up paying is largely going to be a matter of what state you’re buying a home in— and that a lower price doesn’t necessarily translate to lower closing costs.
The good news is that when you’re comparison shopping between lenders, those lenders are required to furnish you with a “good faith estimate,” officially known as a Loan Estimate and Closing Disclosure Form, that outlines what costs you can expect to pay.
This form lists costs like your loan amount, the interest rate, the term of the loan, any prepayment penalties, the origination charge, third party fees, fees for title services, government fees, and more. Keep in mind that not all of these fees are paid by the buyer; some are paid by the seller. (We’ll do a detailed rundown of buyer vs. seller closing costs below.)
Once you request a good faith estimate from a lender, they’re obligated to deliver one by the end of the third day. And remember; the good faith estimate is just that— an estimate. The final costs are likely to be slightly different.
Mortgage Closing Costs
Let’s start with a rundown of the typical buyer closing costs. Most of these costs are going to be lender fees which are associated with the process of securing the loan.
Loan Application Fee
This is the fee the lender charges just to process your loan application. This is usually around $300, though it can be several hundred dollars more.
The lender charges this fee for compiling and evaluating your loan application, so it includes smaller charges like legal fees, document production, and notary costs. This is typically the largest single closing cost for buyers, coming in at 0.5% to 1% of the mortgage amount, on average.
Points on Mortgage
Buying points on your mortgage up front reduces the interest rate on the loan. A point is equivalent to 1% of the loan, and typically gets you a 0.25% reduction in your interest rate.
The lender will require an appraisal of the property, to make sure its value is in line with the amount of the loan. On average, a home appraisal costs between $300 and $450.
Lender-Required Home Inspection Fees
It’s not especially common, but some lenders require home inspections before they will issue a loan. The average cost of a home inspection is around $400.
The lender will want to check your credit, to make sure you have a good record of paying your debts. Fees for pulling a credit report are usually about $25 per borrower.
If the title company (or anyone else in the transaction) wants to confirm the property’s exact boundaries, the lender may order a survey. This costs, on average, $500, but it isn’t usually a requirement.
Lender’s Title Insurance
The lender’s title insurance protects the lender in case the title search overlooks anything, and an ownership dispute erupts down the line. Note that this is separate from the owner’s title insurance.
Lender’s title insurance usually costs around 0.5% to 1% of the total loan amount, with an average cost of $1,000, per Realtor.com.
Mortgage Transfer Taxes
A handful of states charge a percentage-based fee when a property changes ownership. Consult your agent for details. Depending on the market, the seller or the buyer may be expected to pay the transfer taxes; in some places, the two parties split the cost.
Editor’s Note: Make sure you compare lender’s fees from multiple providers when you’re shopping around for a mortgage.
Seller Closing Costs
Typically there are closing costs for both buyers and sellers for a real estate transaction. Let’s look at some of the closing costs that sellers are typically responsible for paying.
Owner’s Title Insurance
Traditionally, the seller pays for the buyer’s title insurance, and the buyer pays for the lender’s title insurance. Title insurance generally costs up to 1% of the home value.
Deed Recording Fees
This is a fee, charged by the county, for recording the property sale. Every county assesses this fee differently, but it’s usually a small fee per page, with total cost generally less than $100.
Prorated Property Taxes
Sellers must pay property taxes for the portion of the year when they owned the property. Depending on how the local municipality assesses taxes— some assess them for the prior year, others do it in advance— this could work out to be a credit from seller to buyer, or a payment from buyer to seller.
Mortgage Prepayment Penalty
Some lenders charge a fee for paying off your mortgage early. Consult your mortgage documents to find out if you have a prepayment penalty, and how much it is— some are a flat fee, while others are percentage-based.
This refers to how much you have left on your mortgage. Because of the way that mortgage interest is assessed, the full payoff amount is likely different than the number on your most recent mortgage statement. To get an accurate figure for your payoff, contact your lender and request a mortgage payoff statement.
This is the tax charged by local authorities on the transfer of a property. Depending on local custom, this can be paid by the buyer or the seller, or split between the two parties.
Credit Toward Buyer’s Closing Costs
A buyer sometimes negotiates a seller contribution toward their closing costs, especially if they’ve got leverage.
This is generally 5-6% of the final sale price, and is split between the listing agent and the buyer’s agent. The entire commission is typically paid by the seller.
How to Reduce Closing Costs
“Closing costs” is actually an umbrella term for a lot of smaller costs. That also means there are a lot of opportunities to reduce those individual costs. Let’s look at some of the easiest ways to bring your closing costs down.
Side-by-Side Comparison of Loan Estimate Forms
Remember the loan estimate forms we mentioned before? These forms will have a detailed rundown of how much each lender is going to charge you, and you might be surprised to see how much variance there is between different lenders for the same loan. A simple comparison should reveal who’s offering the best terms.
Go Shopping for Title Services
Every Loan Estimate form features a section titled “Services You Can Shop For.” This section lists the costs that you can negotiate or comparison shop for, and usually includes the settlement/closing agent, title services, and the home inspection.
The biggest individual cost here is going to be the title services. To find the best rate for the title search, it’s simply a matter of going online and finding out what various title search companies charge, and picking the most affordable one.
For title insurance, it can be more involved. That’s because title insurance is regulated in some states, and unregulated in others. In the unregulated states, it’ll be worth your time to solicit a bunch of estimates and pick out the lowest one. In the regulated states, the fees are going to be more or less identical between providers.
Another clever way to cut costs is to buy the owner’s and lender’s title insurance policies from the save provider; most insurers offer a lower “simultaneous issue rate” for bundling these policies.
Compare Quotes for Home Insurance
This is more or less the same process you used with the Loan Estimate Forms; get quotes from different, competing home insurers, and see who’s offering the lowest rate.
This tip does come with a small disclaimer, though. While everyone likes saving money, the cheapest option isn’t always the best one, especially when it comes to something like home insurance. Make sure you read all the fine print on the policy to make sure you’re actually covered in the ways that you need to be covered; it doesn’t matter how much money you save in the short term if your home insurance fails you when you actually need it.
And if you already have car or renter’s insurance, it’s a good idea to ask your insurer if they offer discounted home insurance to existing customers. Many insurers do, and you can get a fantastic rate if you bundle your policies in this manner.
How to Estimate Your Closing Costs
For this section, we’ve used the excellent closing costs calculator at SmartAsset. We plugged in the U.S. median home value of $260,000 and assumed a standard 20% down payment for a home bought in Queens, NY, to give you an idea of how much typical closing costs can be.
As you can see from the breakdown, even this modest home purchase comes with a surprising amount of closing costs, including over $8,700 in one-time fees, and over $2,300 in escrow and pre-paid expenses. Including the down payment, someone buying an average home would need to bring over $63,000, in cash, to closing.
When you look at it like that, it’s clear that closing costs add a significant amount to the final sale price, and they need to be factored into the transaction well in advance— otherwise, an otherwise confident buyer could be in for an unpleasant surprise when they realize they don’t quite have enough cash on hand to cover everything.
Buying a house is a big deal— often literally the biggest financial deal of a home buyer’s life. A transaction of that size requires a lot of help along the way, from everyone from title insurers, to home inspectors, to county recorders. Those people don’t work for free, which is why closing costs can add up so quickly. Luckily, there are ways to bring those costs down— and, in some cases, eliminate certain costs entirely.
Of course, when it comes to something as complex as a home sale, it helps to have an experienced guide. A good real estate agent has been through hundreds of transactions, and knows all the angles. They can help you negotiate everything from the sale price to the closing costs.
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