Closing costs are a set of fees that are charged to both the buyer and seller when a house is purchased or sold. While closing costs vary depending on location and other factors, they typically include items such as title and mortgage insurance premiums, transfer taxes, loan origination fee, costs for an appraiser, inspection fees, and attorney’s fees.
Buyers and sellers have their own closing costs, but generally speaking, buyers will be responsible for most of the closing costs. In contrast, sellers may be required to pay some of them – such as real estate commissions – and their expenses associated with the sale.
Let’s look at closing costs from a buyer’s perspective and at what all the numbers mean when it comes time to purchase a new home.
Mortgage Closing Costs: How Much Will You Pay?
When buying a home, you can expect to pay an average of two to six percent of the total purchase price on top of your down payment in closing costs. Of course, the exact amount will vary depending on where you’re buying and your loan type. Negotiating with sellers to reduce or even eliminate certain closing costs is possible. These costs, paid on behalf of the buyer, are called by different names: concessions, seller paid closing costs, or seller contribution, but are all, in effect, the same thing, the seller paying a portion of the buyer’s closing costs.
There are limits on how much a seller can pay on your behalf, which vary based on the type of loan, your debt-to-income ratios, and other factors. But, again, your lender will be able to give you a more in-depth look at what is possible.
Is My Down Payment Part of My Closing Costs?
The phrase “closing costs” often gets used loosely to mean various things to different people. It all comes down to what costs and fees you lump into that category. For example, your down payment is not considered a closing cost but a cost you will pay at closing (see what we mean?).
Many buyers consider the entire lump sum they bring to closing as their closing costs, so you may think of it that way, depending on how you look. Closing costs, by definition, are the fees the lender and title company charge the buyer above and beyond the home’s purchase price.
Now that we have closing costs defined, let’s look at some of the fees you may be charged as part of your closing costs. (Fees may be called different things where you live, varying from state to state. If you’d like a more detailed look at your costs, please contact your real estate agent and/or lender.)
Application Fee
A loan application fee is a fee the lender charges to cover its costs for processing your loan. This fee may be charged when applying for the loan but can also be tacked on at closing. The exact amount of this fee will depend on the lender and the type of loan you are applying for.
Attorney Fees
Attorney fees are charges to buyers and sellers for preparing and reviewing the closing documents, deed, a mortgage note, lien, etc. These are not fees paid to an attorney to represent you. You will typically sign a document stating that the attorney fees do not create an attorney-client relationship between you and the lawyers that made or reviewed the documents.
Courier Fee
Courier fees on your closing statement in a real estate transaction refer to any costs associated with sending documents between the lender and the title company. This may include shipping fees, document printing fees, and overnight delivery costs. It can also refer to charges to send a notary to help you sign in a remote location or documentation fees to send someone to record your deed (although these fees are usually separated out).
Credit Report Fee
When your mortgage lender first took your application, they ran a credit report on you. This is the charge for any credit report fees the lender has incurred.
Discount Points
Recently, as interest rates have increased, discount points have become much more common (and sometimes necessary) for home buyers. Discount points buy down your interest rate. A “point” is one percent of the loan amount. So if you had a $500,000 loan and were paying 2 points to get a 5% interest rate, you would pay $10,000 in discount mortgage points just to get that rate. (Numbers are for example purposes only.)
Escrow Account Funds
If your taxes and insurance premiums are paid along with your monthly mortgage payment, your lender will create an account to handle those funds. That account has to have a cushion, so these are prepaid amounts put into the escrow account to set up those reserves. The rest of the funds will be paid as part of your monthly payment, each month paying one-twelfth of the yearly property taxes and homeowners insurance premiums.
Lender’s Title Insurance
Similar to the owner’s title insurance policy, this protects the lender if any claims are made against the property’s title (ownership).
Loan Origination Fees
Think of this simply as the cost of borrowing money. You’ll pay the lender a fee to enable you to borrow what you need. These fees vary (and can vary greatly), so it’s important to know what your upfront payment will cost.
Owner’s Title Insurance
Title insurance is a negotiated cost so that you may be paying it as a buyer, or the seller may be paying for it on your behalf. Title insurance protects you from issues relating to the chain of title. Here in Texas, the state regulates title insurance costs so that every title company will charge the same amount for title insurance. The cost of title insurance is based on the home’s sales price.
Private Mortgage Insurance (PMI) and Fees for Government-Backed Loans
Private mortgage insurance (PMI) is a form of insurance that protects the lender if you cannot repay your loan. It is typically required when borrowers put down a down payment of less than 20% of the purchase price. PMI is added to your monthly mortgage payment and can add up over time.
Government-backed loans don’t use PMI but have something similar called mortgage insurance premium (MIP) for FHA loans and the VA funding fee for VA loans. While both are technically not the same as PMI, they serve a similar purpose – to offset the costs should you default on your mortgage loan.
You should discuss with your lender what these fees mean for your particular situation and how you might avoid them depending on how your loan is structured.
Property Appraisal Fees
If you had an appraisal done on the property, you might have paid for it upfront, but if you didn’t, you might see this fee as part of your closing costs. This is the cost of performing an appraisal. The bank doesn’t want to lend you more than what the market value will allow.
Prorated Property Taxes
Prorated property taxes are your share of the property taxes when you own the property. So if your property tax cycle is a calendar year, for example, but your purchase happens three months into the year, you would pay property taxes but wouldn’t owe for the three months you didn’t live there – the title company will prorate the taxes so that everyone pays only for the time they owned the home.
Upfront Mortgage Insurance Premium
Upfront mortgage insurance premium (UPMIP) is similar to PMI but is collected on FHA loans and is an upfront fee (not a monthly fee). This insurance protects the lender if the borrower defaults on the loan. UPMIP is equal to 1.75% of the loan’s total value. FHA guidelines are ever-changing, so it is always best to discuss with your lender what upfront fees you may be responsible for.
Loan Origination Fees
Quite simply, loan origination fees are the cost of acquiring a loan. They are typically 1-2% of the loan’s value and cover the costs of processing a new loan.
Recording Fees
Recording fees on a closing statement refer to the fees charged by the local government when transferring the deed of a property from one owner to another and are the cost of documenting that transfer in official records. These fees cover the time, effort, and cost of recording payments, transfers, and other related documents. The amount of these fees can vary depending on where you live and the type of document being recorded. Generally, they range from $20 to $200 but can be much higher in certain areas.
Tax Status Research Fees
To ensure that there are no outstanding property taxes and to show the buyer what their taxes will be when they take ownership of the home, someone has to do the research. These fees cover the costs associated with gathering that information, often done by a third-party company specializing in such service.
Rate Lock Fee
A rate lock fee is a fee charged by the lender to protect the borrower against their interest rate increase before the loan closes. This fee can be anywhere from 0.25% – 2% of the loan amount. The amount will depend on the lender, market conditions, and other factors. Rate locks will have a time frame for which they are valid, and if the closing date moves too far and goes beyond that, there may be additional fees to extend the rate lock. Sometimes, use up all of your time. A lender will not extend a rate lock any further – something we see a lot more frequently when interest rates rise because the lender locked one at a low rate but could make a lot more money by loaning that money to someone paying more.
Transfer Tax
Transfer taxes refer to taxes levied by local and state governments when real property is transferred from one owner to another. These taxes are typically based on a percentage of the property’s purchase price or a flat fee charged when the property transfers title. There is no transfer tax in some states – like here in Texas! The amount of transfer taxes vary depending on where you live and can range from minimal to substantial, so it’s important to know what your local laws require before making a purchase.
Can You Have the Seller Cover Closing Costs?
Yes. You can negotiate to have the seller pay specific fees or arrange for a fixed amount. Be sure your intent is clear, as not all buyers and sellers define closing costs the same way. The lender has their closing costs, the title company has their own, and some may lump the real estate agent commissions into the closing costs; so when discussing numbers be precise in your language and never ask for things like splitting or having the seller pay percentages of the closing costs.
No matter which side will pay closing costs, you want to make sure everyone knows how much they will need to pay. Your lender or real estate agent can use a closing costs calculator to give you the estimated closing costs for the buyer.
Real Estate Agent Commissions
While not necessarily considered part of the closing costs, most people associate them with closing costs since they are paid at the closing table. Ask a seller how much are closings costs for them, and we guarantee they’ll count these as part of their average closing costs. In addition, either party can pay commissions, although they typically fall to the seller to pay.
Closing costs can come in many forms, including loan origination fees, title insurance, appraisal fees, and other closing costs. Knowing what to expect when it comes to closing costs is essential when budgeting for a home purchase or sale. It’s a good idea to ask questions about each closing fee involved, understand your loan estimate to see your mortgage costs, and familiarize yourself with common closing costs so that, as a buyer, you can understand the process and mortgage terminology and make informed decisions about your real estate purchase.
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