Mortgage closing costs explained: Your complete guide

In a nutshell

Closing costs include fees for things like property taxes, appraisals and insurance, which are necessary for getting a mortgage. You need to pay them before you receive your mortgage on a property.

• Mortgage closing costs are usually a percentage of your loan amount averaging between 1.72% and 2.47%.
• Since closing costs vary, estimating your closing costs can help you budget for a home purchase.

Why we pay mortgage closing costs

Closing costs represent the extra expenses you have to pay when you finalize a mortgage. Typically, these expenses include property taxes, escrow, bank fees, homeowners insurance and other related costs. While you can't avoid closing costs, the exact amount you pay depends on factors like your lender, location and the price of the property you're buying.

Because closing costs can add up quickly and impact the amount you need upfront, it’s important to factor them in when planning to buy a home.

Types of fees associated with closing costs

Closing costs can differ for each buyer, depending on lender requirements, government regulations and your unique financial circumstances. Here's a rundown of some typical closing costs you might encounter.

• Attorney fees: Certain states may require the presence of a lawyer. You could either pay their fees as part of your closing costs or separately.
• Appraisal fee: To verify the home's worth, you must pay for an appraisal. According to Zillow, the average cost of this is about $400.
• Survey fees: Surveys confirm your property lines. While survey costs vary, you can expect to pay between $376 and $767, according to recent data from Angi.
• Closing or escrow fees: An escrow agent is the person who helps finalize the closing process. You'll need to pay a fee for their services, which typically ranges between 1% and 2% of the sale price.
• Homeowner’s insurance: Depending on your lender and the details of the sale agreement, you might have to cover the first year of your homeowner’s insurance premium as part of your closing costs.
• Miscellaneous fees: At closing, you might find a few extra charges, like a $30 to $50 fee for a credit report or registering your purchase with the local government.
• Mortgage points: These are a form of prepaid interest on your loan. They give you a choice: pay more upfront or have a lower monthly payment. Paying your points at closing can lower your interest rate compared to a loan with no points from the same lender.
• Origination fees: Your lender may request an origination fee to establish the loan, typically ranging from 0.5% to 1% of the loan amount. This fee covers services such as processing your application, funding the loan, performing underwriting and handling other administrative tasks.
• Private mortgage insurance: Your lender might ask you to get private mortgage insurance (PMI) if you don't put down 20%. It's there to protect the lender if you can't keep up with your mortgage payments.
• Property tax: Tax rates can vary depending on the property's location. It's important to keep in mind that after the loan closes the property could be reassessed, potentially leading to an increase in real estate taxes. Your escrow amounts may need to be adjusted to make sure you have enough money to cover any increases in taxes.
• Title insurance: This coverage safeguards you if someone places a claim to your home from before you purchased it. The price you paid for your home typically determines how much you'll pay for title insurance.

The factors that affect closing costs

The different factors that can determine your closing costs amount include the following:

• The price of the home: Some closing costs depend on the property’s price tag. So if you're thinking about buying a pricier property, be ready to possibly pay more. Also, bigger properties can mean more expenses for surveys and home warranties.
• The amount you put down: Lenders may require you to pay private mortgage insurance (PMI) if you’re unable to put 20% down, which can add to your total closing cost amount.
• Your lender: Not every lender has the same fees and rates, so it's smart to check out a few lenders to compare their offers.
• Your credit score: Your credit score can impact how much you pay when you close on your house. Having a higher score might give you more bargaining power with your lender.
• Type of loan: Some types of loans might require you to pay some costs right away. For example, a VA loan could have a VA funding fee. This fee makes the loan more affordable because VA loans don't need down payments or monthly mortgage insurance.

How much are typical mortgage closing costs?

According to a recent study by Assurance IQ, average closing costs in the U.S. are around $4,243. It's a good idea to budget around 1.87% of the home's value for these costs. However, these expenses can vary depending on where you live, among other factors. In some states, closing costs may be as low as 1.72% of the loan value; in others, they could be as high as 2.47%.

For example, if you're purchasing a home for $300,000, you should expect to pay between $5,160 and $7,410 in closing costs.

How to calculate closing costs

Your lender must send you a loan estimate (LE) promptly, usually within three days of your mortgage application submission. This document provides a comprehensive breakdown of your estimated closing costs, tailored to your specific loan type. The LE includes details such as the loan amount, monthly payment, interest rate and closing costs.

When you’re close to closing, your lender will send a final closing disclosure outlining all your closing costs. It's crucial for you to compare this document with the earlier loan estimate (LE) you received. This comparison ensures transparency and helps you to identify any discrepancies. Ask your lender or attorney for clarification if anything seems unclear or raises questions.

Consider using a closing cost calculator to help you prepare and understand your costs beforehand.

How to reduce closing costs

Buying a home involves several costs, but you can make things easier on your wallet by cutting down on your closing costs. Here's how:

• Compare lenders: Shopping around for offers from different lenders can help you find the best rate and save money. Try getting mortgage approvals and loan estimates from several lenders. Talk to them, ask questions, and see if you can lower your fees. Also, it's smart to shop around for home insurance since prices can vary from insurer to insurer.
• Ask the seller to contribute: You can also consider negotiating with the seller to cover some of your closing costs. Depending on the location and market conditions, sellers might be open to paying some or all of your closing costs.
• Explore rebate programs: Some lenders provide rebate programs for buyers. These programs allow you to lower your upfront costs by agreeing to higher payments over the loan term.

The AP Buyline roundup

Dealing with mortgage closing costs might feel overwhelming, especially if you're buying a home for the first time. You should compare different loan and lender options to find the best fit for your needs and budget and calculate your closing costs before you close on your mortgage. It's a good idea to budget around 1.87% of the home's value for these costs, but this can vary depending on where you live.

Frequently asked questions (FAQs)

What is the formula for calculating closing costs?

To estimate your closing costs, multiply your loan amount by the average closing costs, which are typically between 1.72% and 2.47%. For example, if you're borrowing $200,000, your closing costs will be between $2,540 and $4,940. Keep in mind, though, that this is just an estimate.

What happens if you are short on closing costs?

If you're facing a shortfall for closing costs, you have several options to reduce them:

• Negotiate with your lender.
• Request the seller to contribute to some of the costs.
• Compare service providers to find lower costs.
• Explore first-time homebuyer programs.

What is an accurate estimate for closing cost expenses?

While closing costs vary, they usually fall between 1.72% to 2.47% of the loan amount. That means if you're getting a $100,000 mortgage, you'll likely pay somewhere between $1,720 and $2,470 in closing costs. However, this is just an estimate, and your actual closing costs will depend on your location, credit score and loan type.

What happens if I can't afford the closing costs?

You might consider a no-closing-cost mortgage if you can't afford the closing costs. With this type of loan, you don't pay the closing costs upfront. Instead, they're added to your loan amount and paid off gradually with interest. It might increase your overall costs due to the interest, but it can ease the burden during the closing process.