A Deep Dive Into Mortgage Closing Costs
Certified Financial Counselor
Ashley Altus is a writer and certified financial counselor through the National Association of Certified Credit Counselors.
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Closing on a loan is a very exciting time in the home-buying process. It means the funds have been distributed, and you’re officially a property owner! But before you get there, you’ll have to pay closing costs.
It’s probably not a surprise that the path to homeownership is paved with upfront payments, but costs are also required at the tail end of the purchase process, too. Keeping closing costs top of mind during the home search process can help you stay on track with your budget and avoid surprises.
Let’s take a detailed look at closing costs, what you should expect to pay, and how to negotiate them.
What Are Closing Costs?
Just as it sounds, homebuyers pay an array of different fees on a real estate transaction during the closing process. Think of all the people and entities that have been a part of your mortgage journey. From your loan officer to your real estate agent, everybody who has been a part of your journey will receive compensation. Nearly every step in the loan process has a cost or fee that the home buyer needs to pay.
How Much Are Closing Costs?
The type of loan, home loan amount, and location of the property are the three primary factors that will dictate the amount you’ll pay.
Here’s one example: Average closing costs in the United States stood at $4,243 according to a 2023 Assurance study. These costs factor in common expenses such as mortgage taxes and appraisal fees, which we describe in more detail below.
Average closing costs vary significantly by state: The highest is in New York, at $8,039, while the lowest is in West Virginia, at $2,124. Closing costs varied by state to 1.2% to 2.47% of the value of the home.
Estimating Closing Costs
While an online mortgage loan cost calculator can give you a ballpark figure for the amount you should expect to pay in closing costs, a loan estimate from a housing lender is more accurate.
When a home buyer fills out a loan application, they’ll receive a loan estimate that shows a detailed breakdown of all costs associated with closing that they will pay before the home is officially theirs.
Before a home buyer officially closes on the loan, a lender will issue a closing disclosure. This closing document will include the set-in-stone amount you will pay in upfront closing fees. You’ll have several business days to review the closing disclosure, compare it to the initial loan estimate, and raise any discrepancies with your lender.
Types of Fees Included in Closing Costs
Generally, the buyer will pay all of the closing costs in the home-buying process. However, depending on negotiations with the seller or certain state laws, the seller may contribute to these costs.
The present real estate market will also play into buyer and seller negotiations. In a buyer’s market, you may win more seller concessions. The opposite is true in a seller’s market.
"In a hot market, the buyer can expect to pay all closing costs," says Tory Doucet, an attorney at Doucet Co. "During more normal times, the seller would normally contribute a few percent."
When you’ve finally reached the final stages of the home-buying process, here’s a list of typical costs that buyers and sellers should expect to pay.
Closing Costs For Sellers
Closing costs for sellers will vary based on the property location, but at the very least, sellers are expected to pay the following:
1. Real Estate Commissions
Real estate agents for both buyers and sellers are paid for their work after a home sells. Their commission is typically a percentage of the home’s purchase price. Technically, the seller’s agent is paid by the seller, and then shares their commission with the buyers’ agent. The exact amount of the split is decided ahead of time.
2. Transfer Tax
As a home moves from one property owner to the next, expect there to be a real estate transfer tax. Transfer fees are typically paid by the seller, but the buyer could also be on the hook for it.
3. Property Taxes
If the seller owes anything to the county, they’ll need to pay any unpaid taxes on the property before closing.
4. Condo Fees
Similarly, if the seller owes any amount of condo fee, that would have to be paid at closing as well.
5. Condo Transfer Fee
Either buyer or seller can be charged by the condo association a small fee for the transfer of condo ownership.
6. Attorney Fees
If sellers employed an attorney, they would have to pay an attorney for professional services rendered.
7. Recording Fees
If the seller had a mortgage, the discharge of that mortgage would have to be recorded with the local Registry of Deeds. The seller is charged for this recording as well.
Loan Closing Costs for Buyers
Buyers will pay different closing fees based on the type of mortgage they’re taking out, the location of the house, and state and local regulations. For example, a government-backed loan, such as an FHA loan will require buyers to pay an FHA mortgage insurance premium, while a conventional loan may require private mortgage insurance if the buyer’s down payment doesn’t meet a certain threshold (typically 20%).
In any case, buyers should expect to pay the majority of the fees when closing on a property.
Here’s a list of common closing costs buyers may encounter:
1. Appraisal Fee
An appraisal is used to assess the value of the property and let lenders know how much it’s truly worth. This is important, because a lender will want to know the buyer is paying fair market value before issuing a loan for a house that may not be worth the price. You may have to pay this fee to the appraiser on the day of the appraisal instead of during the closing.
2. Attorney Fees
You’ll pay this fee if you choose to use a real estate attorney to review your loan documents or if you live in a state that requires buyers to use their services.
3. Lender Fees
You may also see this referred to as a loan origination fee or underwriting fee. The lender charges this to cover administrative costs for the loan, such as the application fee, and any credit report fees that go into their due diligence when approving you for the loan.
4. Inspection Fees
A homeowner’s inspection is typically part of the purchase process to help the buyer and lender understand the condition of the property. While the buyer will typically pay for the inspection at the time of service, the findings can impact the buyer’s closing costs. If issues are found with the home during the inspection, the buyer may ask the seller to cover the cost of repairs in the form of a closing credit.
5. Title Fees
Title insurance protects both lenders and home buyers against future claims to the property. Most lenders will require a title insurance policy and a title search to protect themselves against risk.
6. Private Mortgage Insurance (PMI)
This is a type of mortgage insurance you might be required to buy if you take out a conventional loan with a down payment of less than 20 percent of the purchase price. It protects the lender if you stop making payments on your loan.
7. Recording Fees
Buyer will have to pay for their deed and mortgage documents to be recorded at a local registry of deeds.
8. Real Estate Taxes
If the seller prepaid their real estate taxes in advance, the buyer will have to reimburse the seller for the amount of taxes owed after the closing date.
Buyer will likely see miscellaneous delivery charges, wire fees and other charges totaling a few hundred dollars. Additionally, prepaid charges will be due from the buyer at closing, before the technical due date. Since mortgage payments are always made in arrears, interest through the end of the month is always included as a prepaid item. Prepaid charges may also include hazard insurance or other special assessments.
Negotiating Closing Costs
Closing costs are flexible. By negotiating with your mortgage lender, you could potentially reduce your loan costs.
1. Comparison Shop Lenders
Shopping around and comparing lenders is one of the most significant ways to decrease your costs during the homebuying process. With several estimates in hand, you can go line-by-line and see how lenders stack up against each other to find the best deal.
"Banks can vary greatly on what they charge for closing costs," Doucet says. "Usually, the best deals are at smaller regional banks or credit unions."
For an accurate assessment, stick to comparing estimates that have the same loan type, loan amount, and loan terms. You will also want to pull your estimates on the same day for a true apples-to-apples comparison.
2. Consider a No-Closing Cost Option
Some mortgages don’t have closing costs. Sounds great, right? But, there is a catch and it will cost you. When you choose a no-closing cost loan, home buyers won’t have to pay closing costs upfront. Instead, lenders will either roll these costs into the total mortgage cost, so you'll have a higher loan balance, or charge a higher interest rate.
"If the buyer is unable to come up with the extra money to cover some of the closing costs, they may see if the seller would accept a higher purchase price in exchange for contributing towards costs," Doucet says.
If paying several thousand dollars of upfront loan fees doesn’t interest you, a no-closing cost loan could be an option. However, you’ll likely end up paying more over the life of the loan for the convenience of fewer upfront costs.
It’s also important to note that these types of loans don’t cover things like home inspection costs, homeowners insurance premiums, or property taxes.
3. Find Assistance Loan Programs
There are some local and federal government loan programs that can give home buyers money to fund the fees they encounter during the closing process. Your real estate agent or loan officer may be able to assist identifying programs in your locality.
4. Think About Discount Points (“Points”)
These are fees paid by the borrower to the lender at closing in exchange for a lower interest rate. The borrower is paying money at closing to get a lower interest rate over the life of the loan. This is referred to as “buying down” the rate.
A point is equal to 1% of the mortgage amount or $1,000 for every $100,000. For example, one point on a $200,000 loan is $2,000. Assuming the interest rate on a loan is 5.125% and a point lowers the interest rate by .25%, the rate would drop to 4.875%. Paying points only makes sense if the borrower is certain he/she will stay in the mortgage long enough to realize the savings from a lower interest rate.
5. Research Lender Credits
A lender credit or closing cost credit is a credit provided by the lender to offset some or all of the closing costs. Borrowers who receive closing cost credits receive higher interest rates than borrowers who do not elect closing cost credits because the lender "bakes in" the credit into the interest rate.
The Bottom Line
As you’ve probably gleaned, quite a bit happens during the mortgage process, especially at closing time! The final loan documents you sign will impact your financial future for years to come so make sure to thoroughly read the purchase agreement.
For this reason, you’ll want to negotiate loan fees and ensure you’re comfortable with your monthly payment before signing the dotted line for the best real estate deal. As a first-time home buyer, strategize with your financial advisor for the best loan terms.