What are Closing Costs and How Much Are They?
When you purchase a home, and subsequently close on that home at a title company, you'll pay closing costs regardless of whether you're the buyer or the seller. Closing costs are fees - charges by lenders and other third parties - related to a sales transaction for real property.
In the case of a home buyer, the buyer can expect to owe the lender not only the down payment, principal and interest related to the mortgage, but also fees related to originate the loan, to process the loan, and to underwrite the loan. The buyer can also expect to pay fees to the title company for escrow services, courier fees, attorney fees, and recording fees. Some of these fees are negotiable, and are the majority of them are paid at closing.
In the case of a home seller, the seller can typically expect to pay realtor commissions, escrow fees, attorney and recording fees as well as any negotiated seller concessions towards buyers closing costs or home warranties.
What charges go into your closing costs?
Closing costs can vary widely based on your location and the type of property that you buy, but will often include thing like:
- Fee for running a credit report
- Loan origination
- Attorney's fees
- Discount points (fees paid to lower your interest rate)
- Title insurance
- Escrow fees
- Escrow deposits
- Recording fees
- Underwriting fees
How much will you pay in closing costs?
A typical home buyer will pay between 2 and 5 percent of the purchase price of the home in closing costs. So, for a $250,000 home, a buyer should expect to pay between $5,000 and $12,500 in closing costs. According to a recent survey, the average homebuyer pays roughly $3,700 in closing costs in America.
Lenders are now required by law to provide a good faith estimate (GFE) within three days of loan application. This good faith estimate provides a summary estimate of the expected closing costs on your home as well as an estimated monthly mortgage payment. Keep in mind this is just an estimate. Several days prior to your closing, you should expect to receive a HUD-1 settlement statement, which outlines the final closing costs and amounts you will need to bring to close on your new home. By law, there can be no more than a 10% disparity between the GFE and the final closing costs on the HUD-1 Statement.
Is it possible to avoid closing costs?
Zero closing costs mortgages are a fallacy. With these types of loans, lenders are simply taking those one-time closing costs, and rolling them into the mortgage, usually by way of a higher interest rate - which costs you much more over the life of the loan.
Depending on the loan product you use though, buyers can negotiate deals in which sellers help offset those closing costs. All loan products will dictate how much a seller can contribute to a buyer's closing costs, typically from 2% - 6%. In slow real estate markets, buyers usually have a much stronger negotiating position to ask for seller contributions. In strong real estate markets, ones in which sellers are usually seeing multiple offers for their homes, buyers almost always will a have to add whatever contribution they're asking for to the final offer price.
For example if a buyer is offering on a $150,000 home and is trying to minimize their closing costs, they might offer $154,500 and ask for $4,500 back in seller contributions to closing costs. As long as the home can appraise for that higher value, they're nothing prohibiting either party from making these kinds of arrangements.