Key Takeaways
- Closing costs can be 2-5% of your loan amount.
- Shop around to save money on lender-related fees.
- Some closing costs may be negotiable with your lender.
- Borrowers may roll closing costs into their loan if allowed.
Article Summary
Closing costs are the fees and expenses home buyers pay in conjunction with getting a mortgage loan.
Closing Costs: Explained in Plain English
Closing costs are the various fees and expenses that home buyers must pay when completing a mortgage transaction. These costs are separate from the down payment.
Closing costs fall into three main categories: lender-related fees, third-party service costs, and prepaid items. Each category serves a different purpose in the home buying experience and may be negotiable to varying degrees.
For example, if a first-time home buyer purchases a $300,000 home, they might expect closing costs up to $15,000, although the actual closing cost number is usually much, much less. Closing costs are paid in addition to a down payment and are required to be paid at closing, either in cash or by rolling them into the loan amount if the lender allows.
Types of Closing Costs
Lender-Related Closing Costs
Lender-related closing costs are fees the mortgage lender charges for processing and approving your loan. These costs vary significantly between lenders, so shopping around can save you money. Here are the most common lender fees you may see:
| Fee | What It Covers |
|---|---|
| Loan origination | Lender's charge to process your loan |
| Discount points | Optional fee to lower your rate |
| Underwriting | Lender's review of your finances |
| Document preparation | Preparing your loan paperwork |
| Credit report | Pulling your credit report |
Third-Party Service Costs
Third-party closing costs go to companies or professionals outside the lender. These costs are roughly the same no matter which lender you choose, though you may be able to shop around for some services. These are typical services you may pay for:
| Fee | What It Covers |
|---|---|
| Appraisal | Professional home value estimate |
| Title search/insurance | Check and insure property ownership |
| Escrow | Escrow agent's services |
| Attorney | Legal review (some states) |
| Survey | Property boundary check |
| Home inspection | Professional home inspection |
Prepaid Items
Prepaid items are costs you pay upfront at closing that cover future expenses. These costs are based on when you close during the year, not which lender you choose. Here are the main prepaid items:
| Item | What It Covers |
|---|---|
| Property taxes | Taxes for the current period |
| Homeowners insurance | First year of insurance paid at closing |
| Mortgage insurance | Upfront premium for FHA or other insurance |
| Escrow account funding | Initial deposit for taxes and insurance |
How Much Are Closing Costs
Closing costs vary by loan type, with conventional loans typically having the lowest costs and government-backed loans often requiring higher upfront expenses.
Based on 2024 mortgage data, here's what home buyers can expect to pay:
| Loan Type | Typical Fees Included | Average Closing Costs |
|---|---|---|
| Conventional | Appraisal, lender fees, title | 1.54% of loan amount |
| FHA | Upfront MIP, appraisal, lender fees | 3.77% of loan amount |
| VA | VA funding fee, appraisal, title | 1.97% of loan amount |
| USDA | Guarantee fee, appraisal, lender | 3.42% of loan amount |
| All Types | Varies | 2.06% of loan amount |
Conventional loans typically have the lowest closing costs because they don't require upfront mortgage insurance premiums. FHA loans have higher closing costs due to the upfront mortgage insurance premium (UFMIP) that's typically financed into the loan amount.
VA loans often have lower closing costs because veterans may not pay certain fees that other borrowers face.
USDA loans have higher closing costs similar to FHA loans due to their upfront guarantee fee.
For a $300,000 home purchase, these percentages translate to:
- Conventional: $4,620 in closing costs
- FHA: $11,310 in closing costs
- VA: $5,910 in closing costs
- USDA: $10,260 in closing costs
Keep in mind that these are averages and your actual closing costs may vary based on your specific situation, location, and lender.
Common Questions About Closing Costs
Frequently asked questions about closing costs and how they work in home buying.
How much should I expect to pay in closing costs?
Closing costs typically range from 2% to 5% of the home's purchase price. For a $250,000 home, this could mean $5,000 to $12,500 in closing costs. The exact amount depends on factors such as the loan type, property location, and specific services required. Contact lenders directly for detailed closing cost estimates.
Can I negotiate closing costs?
Some closing costs may be negotiable, particularly lender fees and third-party service costs. You may be able to shop around for services like title insurance, appraisals, and home inspections. Some lenders may offer to cover certain closing costs in exchange for a higher interest rate. Compare lenders to find the best closing cost offers and contact multiple lenders to compare estimates.
What's the difference between closing costs and the down payment?
The down payment is the portion of the home's purchase price that you pay upfront, while closing costs are the fees and expenses associated with the mortgage transaction. Down payments typically range from 3% to 20% of the home price, while closing costs are usually 2% to 5%. Both amounts are typically due at closing.
Can I roll closing costs into my mortgage?
Some lenders may allow you to roll closing costs into your mortgage loan, but this increases your loan amount and monthly payments. This approach may also result in a higher interest rate. Contact lenders directly to learn about their specific policies regarding rolling closing costs into the loan.
Are there any closing costs I can avoid?
Some closing costs may be avoidable by shopping around for services, negotiating with lenders, or choosing different loan options. However, many costs are required by law or are necessary for the transaction. Third-party costs like appraisals and title insurance are typically mandatory. Contact lenders and service providers to understand which costs may be negotiable.
How do I get an accurate estimate of my closing costs?
Lenders are required to provide a Loan Estimate within three business days of receiving your loan application. This document provides a detailed breakdown of expected closing costs. You'll also receive a Closing Disclosure at least three business days before closing with the final costs. Compare lenders to get multiple estimates and contact lenders directly for specific closing cost details.
