Are you in the process of purchasing a house? Your down payment isn’t the only thing you need to bring to the closing table when you buy a home. To close on your home loan and finally get the keys to the property, you’ll likely need to pay closing costs, which are all of the fees associated with the mortgage.
Understanding closing costs can be somewhat complicated. Below we’ll give you an overview of everything you need to know about closing costs before you finalize your loan.
What are Closing Costs?
Closing costs are fees charged by your lender, real estate agent, and other third parties involved in the home-buying transaction. The fees include various charges related to:
- Property expenses.
- The mortgage application process.
- Other paperwork.
As a homebuyer, you typically pay most of the closing costs. However, the seller usually pays real estate agent commissions and transfer fees.
How Much Are Closing Costs?
Closing costs can make up about 3 – 6% of the loan amount. This means that if you take out a mortgage worth $200,000, you can expect closing costs to be about $6,000 – $12,000. Prior to closing your loan, you’ll receive your final Closing Disclosure listing your closing costs. Be sure to compare your Closing Disclosure to the Loan Estimator you received when you applied for your loan.
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What Costs are Included?
Closing costs include a combination of one-time fees and initial installments of recurring costs. Many of these fees are variable and may differ based on the location, size, and cost of the property you’re buying.
Here’s what you can expect to pay for each.
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An application fee is a one-time charge by lenders for submitting a loan application. Not every lender charges this fee, but it is usually paid when you apply and is often nonrefundable.
Credit Report Fees
This fee covers the cost of making copies of your credit report to assess your mortgage loan application. Your credit score, included in your credit report, is one of the most important factors in determining the interest rate offered to you.
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Loan Origination Fee
The loan origination fee is charged by your lender in exchange for processing your loan. It is typically between 0.5% and 1% of the total loan amount, which means it may cost several thousand dollars. The origination fee may also include underwriting costs; if not, you may pay an additional fee for your loan to be underwritten.
Government Recording costs
This fee covers the required registration of the property under your name on your deed, mortgage and any other official documents related to your home loan. It is assessed by state and local government agencies and can vary by agency.
This fee is paid to the professional who assesses the value of the purchased home. The average appraisal cost can vary depending on the size or value of the home.
Home Inspection Fee
This fee is paid to the inspector who examines the physical structure and condition of the home, and it can vary depending on your geographic location. Getting your home inspected before you close is not required, but it is highly recommended so that you know about any potential issues with your new home before you buy.
This fee is paid to a title company that searches county records to ensure the title to the property is clear and free of any complications, such as pending debts or liens.
This fee is paid to a property surveyor who assesses the property you are buying. The survey identifies the property’s boundaries and helps you learn what you’re allowed to do to the property in case you plan to build onto the home after you buy it.
In many states, an attorney must oversee the closing process, taking the place of an escrow company or other settlement agent. This closing attorney does not represent the buyer or seller, and therefore the cost is typically split between parties.
Most lenders will require you to pay the first year of your homeowner’s insurance premium on or before closing day. The average homeowners’ insurance premium in the United States is $1,784 a year, but your home’s value, location, and coverage amount will affect the cost.
Initial escrow payments
The initial escrow payment is money deposited into your escrow account to pay future homeowners insurance and property taxes. Average annual property taxes are $2,471, though taxes vary widely based on state tax rates and median home values.
The specific closing costs you’ll pay depend on the type of loan you have, your home’s value, and your state’s laws. Sellers may also need to pay closing costs, depending on the sale agreement.
You might save on your closing costs by negotiating with your lender. You may also want to ask your seller to pay a percentage of your closing costs or take a no-closing-cost loan.