Closing Costs Can Add $15,000 to an Average Mortgage. Here’s How to Pay Less.

Photo illustration to accompany article on home buying and closing costs Getty Images

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If you’re thinking about becoming a homeowner — especially in this economy — you’ll need to get an idea of how much it really costs. 

And it’s not as simple estimating your monthly mortgage payment. 

People who buy a home are likely to be hit with nearly a dozen so-called closing costs: things like broker fees, title insurance, prepaid interest, and appraisals. Altogether, these costs can add $15,000 to an average home sale — and that’s money due up front, in addition to your down payment.  

In a year of high unemployment and an uncertain housing market, you should account for closing costs early on so they don’t eat into your down payment or the money you’ve set aside for emergencies

Your exact closing costs will depend on a lot of factors, like the type of loan you have and where your future home is located. Because there are different rules depending on the city or state you’re in, working with a local professional can be a big benefit. You may even be able to reduce your closing costs with a little negotiation or shopping around.

Sellers incur some closing costs too, but most of the burden falls on the buyer. Here are the closing costs you should account for as you’re vetting your budget. 

What Are Closing Costs?

The term “closing costs” is a catchall for the taxes and fees associated with purchasing a home that go beyond the sale price. These apply to both new mortgages and refinanced loans. While many closing costs are fixed, you may be able to negotiate or shop around for some — more on that later. 

For the buyer, closing costs typically range from 3 to 6% of purchase price. So on a $275,000 home (the approximate national median sale price in 2020), you could pay between $8,250 and $16,500 in closing costs. This expense is in addition to any down payment you make on the mortgage. 

The seller is also responsible for some costs, like a real estate agent’s commission.

What Do Closing Costs Include?

Within three business days of applying for a loan, your lender is required to get you a loan estimate. This document details all of your closing costs with an estimated price for each one, in addition to an estimated monthly payment and interest rate. Then, at least three days before settlement on your home, you’ll get what is known as a closing disclosure. The closing disclosure shows the final closing costs, interest rate, and payment details. 

The types of fees you’ll be responsible for at closing will vary depending on where the property is located and the type of loan you’re getting. Generally, closing costs fall under three main categories: lender fees, property fees, and prepaid costs.  

Costs change depending on the region or even the municipality where you’re purchasing a home, says Esther Phillips, a senior vice president at Key Mortgage Services, an Illinois-based brokerage. As an example, Phillips points to the city of Chicago, where the buyer pays a transfer tax of $7.50 per $1,000 in purchase price — a cost that few buyers in the suburb of Schaumburg incur, where the transfer tax of $1 per $1,000 in purchase price is most commonly paid by the seller. 

Lender fees

When you get a mortgage for your home there are a variety of costs associated with servicing that loan. Depending on your lender or region, you may not pay some of these fees, or they may have a different name. 

Loan origination fee: The loan origination fee is charged as a percentage of the loan. Most loan origination fees cost between 0.5% and 1% of the mortgage amount. This could also be labeled as a processing or underwriting fee.

Application fee: This fee covers the administrative costs of applying for a loan. Once you submit your application, it’s nonrefundable. 

Attorney or title fees: Depending on which state you’re purchasing a home in, you may need to pay for an attorney to handle the transaction. There are also other fees associated with transferring the property to your name. Notary fees, title search fees, and escrow fees are just a few of the costs you could be responsible for.

Discount points: This is an optional fee you can pay to reduce your interest rate by a given amount. Each point costs 1% of your mortgage total. On a $275,000 loan, for example, you’d pay $2,750 to reduce your interest rate by 1%. You’ll need to do some math, comparing your estimated monthly payments under various discounted interest rates, to determine whether this strategy is right for you. 

Mortgage insurance premium: If your loan requires you to have private mortgage insurance you can pay the premium at closing or have it rolled into your monthly payment.

Mortgage broker fee: If you’re working with a mortgage broker, they’ll charge a fee for their services. On average, this fee is 1 to 2% of the loan amount.

Title insurance: The lender will require you to purchase title insurance, which protects them from liens against the property, disputes over the property, or the cost of correcting clerical errors. You can also purchase buyer’s title insurance.

Property fees

As part of the loan approval process, you will need to hire professionals to assess the value of your new home. You’ll also want to get it professionally inspected to ensure there aren’t hidden issues you’d want to know about before closing. For a typical single family home, an appraisal or home inspection will cost about $300 to $600 each.

Appraisal: If you’re taking out a mortgage on a home, you will need to hire an appraiser to verify the value of the property. An appraisal protects the lender by ensuring the property has enough value to justify the loan. An appraiser may also identify repairs that need to be made before closing.

Home inspection: Lenders rarely require a home inspection, but even if they don’t, you may want to get one anyway. A home inspection is a more thorough assessment of the condition of the home than an appraisal. If a home inspector finds a significant problem, this can be used to negotiate the price of the home, or may even give the buyer the right to walk away from the deal.

Other inspections: You may be required, or want, to pay for other types of inspections or certifications. Pest inspections and flood certification (to determine if the property is in a flood zone) are common. Your lender may even want you to have the property surveyed to verify the land boundaries.

Prepaid costs

Certain homeownership costs will need to be paid up front. Often, these fees will be held in an escrow account and used to pay your taxes, dues, or insurance premiums when they are due.

Property taxes: At closing the buyer will be responsible for paying prorated property taxes for the remaining tax year. If the seller has already paid property taxes for the year, the buyer will reimburse the seller for the prorated amount.

Prepaid interest: When you close on your loan you will prepay interest, based on the daily rate, from the time when you close on the loan to your first payment. So closing earlier in the month means you’ll need to pay more interest up front.

HOA fees: If the property is part of a homeowners association, you may need to pay those dues up front.

Homeowners insurance: The lender will require you to purchase homeowners insurance to protect their investment. You can pay your homeowners insurance premiums in advance of closing, or you might pay at closing with the money going into an escrow account.

Pro Tip

To account for closing costs in your budget, plan on spending 3 to 6% of your future home’s purchases price.

Who Pays Closing Costs?

Most of the closing costs will be the buyer’s responsibility, but the seller incurs fees as well. The biggest cost for the seller is the real estate agents’ commission, which is usually 5 to 6% of the sale price. This commission is split between the buying and selling agent, unless a single agent is representing both the buyer and seller, or if either party doesn’t use an agent.

The majority of other expenses associated with selling a home are either optional for the seller or vary by state and locality. A seller isn’t required to pay for a pre-listing home inspection, but they may want to speed up the process by identifying and fixing potential issues ahead of time. 

Fees for the buyer’s title insurance, as well as local or state transfer taxes, can fall on the seller, buyer, or be split between both. Also, depending on when the home is sold and when property taxes or homeowner’s association fees are due, the seller may owe the buyer a prorated amount. For example, if the home is sold in March, but property taxes aren’t due until June, then the seller will pay the buyer for three months of taxes. 

How to Reduce Closing Costs

First, read up on the fees and costs listed in your loan estimate. “This will estimate the costs of things like title insurance,” says Melinda Opperman, the president of the nonprofit HUD-approved independent counseling agency Credit.org. But you don’t have to agree to all of these services. “You could shop around for a better deal,” she says.

Opperman recommends taking time to ask the lender about each fee to see if it’s necessary, or if it can be waived or reduced. She also advises home buyers to compare offers between different lenders. To get an estimate, you don’t have to pay an application fee, which can top $300. However, you may have to pay $25 to $50 for a credit check. Once you have a few loan estimates, you can compare fees and possibly negotiate. 

You may even be able to leverage your relationship with your local bank or credit union, suggests Opperman. “If you go to your own financial institution for a mortgage loan, they may offer you a loyalty discount,” she says.

In Phillips’s opinion, attorney fees (in states that require attorneys to complete real estate transactions) present the best opportunity to save on closing costs. Since different attorneys have different specialties and fee structures, she warns that it’s best to use an attorney who specializes in real estate and charges a flat fee. An attorney who charges by the hour can seem like a good idea if the deal goes smoothly and simply, but can quickly add up if there are complications — as anyone who has bought a home can tell you is very common. 

Title fees are another great target for saving money, as title search and title insurance costs are typically the most expensive fees you can shop for.

Another thing to note is that charges shown on a preliminary closing disclosure as “services you cannot shop for,” such as certain lender-specific fees, will not increase on the final closing disclosure. So you can at least count on those holding steady when planning for closing.

How to Pay Less Up Front

There are some ways to reduce the amount of cash you need to bring to the table for closing costs, such as negotiating or adding the costs to your mortgage. You may also be able to work with the seller to get so-called seller credits. 

A seller credit essentially means the seller agrees to deduct some of their final take-home cash to alleviate the buyer’s closing costs. These credits could also be built into the negotiated price. “You could offer somebody $100,000 for a house with no credits — or $103,000 for the house with $3,000 in credits,” says Phillips, who notes that she uses this strategy for consumers quite often. And if you’re in a buyer’s market, or the seller is desperate to sell, you may be able to negotiate seller credit even without increasing the sale price. 

Some lenders offer mortgages where the closing costs can be included as part of the loan itself. The way it works is, you’ll take a higher mortgage interest rate and get credits to offset closing costs. In this situation, Phillips’s advice is to have your loan officer do an analysis to help you decide if it’s better to pay more up front or to pay more over the life of the loan.

Finally, talk to your lender or realtor to see if there are any relief programs or special loans you qualify for. These types of programs are often administered at the local or state level, and can be quite valuable. You may have a program in your area that offers low cost or forgivable loans for closing costs or down payments to first-time or low-income home buyers.