[Blog] What Are Closing Costs When Buying a Home?
Before you make an offer on a new home, it’s crucial to be aware of all the costs involved. While most homebuyers focus on saving for a down payment, it’s also important to keep closing costs in mind when budgeting for a new property.
But what are closing costs when buying a new home, and what do they include? This guide has some information regarding the nuances of closing costs and what you can expect as a buyer. When you’re properly prepared for closing day, the home-buying process should be seamless and more stress-free.
What Are Closing Costs?
Closing costs (also called mortgage closing costs and fees) are additional costs when you pay for and secure a loan for a home. These costs are in addition to the down payment, home inspection fee, and earnest money you’ve already paid. You can generally expect to pay between three and five percent of the total loan amount in closing costs.
You’ll receive a more accurate estimate of closing costs when you receive a form called the Closing Disclosure. This official disclosure must be sent to you at least three business days before the official closing date. The detailed, five-page form will be sent after your lender submits the official clearance to close.
Go over the closing disclosure carefully and ask questions of your lender before closing day so that you’re prepared in advance. Once you sign and return the form, you’ll need to have the closing costs with you during the official closing process.
What Do Closing Costs Include?
There are several line items included in closing costs, which will vary depending on your situation. Here’s an overview of what most closing costs include.
- Loan origination fees: These fees include the cost of underwriting and processing the loan and are usually between 0.5 to one percent of the loan.
- Appraisal and survey fees: The lender will require an appraisal and survey to check the home's fair market value, and this cost generally runs several hundred dollars, depending on your location.
- Title insurance: This insurance policy ensures that the property can be legally transferred from the seller to the buyer and is based on the total purchase price.
- Homeowner’s insurance: You’ll typically pay the first year of homeowner’s insurance at once during closing.
- Private mortgage insurance (PMI): If your lender requires you to pay PMI, then the first month is included in closing costs, and the rest is rolled into the loan balance.
- Mortgage points: Buyers who purchase mortgage points to lower the interest rate must pay them directly to the lender at closing.
- Property tax: Most buyers pay six months of advance property tax at closing as part of the escrow.
- Other fees: You may also have to pay escrow agent closing fees, attorney fees (in some states), and credit report fees when applicable.
How Much Are Closing Costs?
Generally, closing costs for a new home range between as little as two percent to as much as six percent of the total purchase price. Remember, your total closing costs will vary depending on whether you’ve purchased mortgage discount points, if you need to hire a real estate attorney, and whether or not you’re paying PMI. Always refer to your final Closing Disclosure form to get a clear picture of the final costs.
As an example, closing costs for a $300,000 home can range from approximately $6,000 at the rate of two percent to $18,000 at the higher rate of six percent of the total cost. Keep in mind that you cannot finance closing costs, so you’ll need to bring a cashier’s check or plan to make a wire transfer to get the keys to your new home.
Can Closing Costs be Lowered?
While it’s not always possible to change the basic home closing costs, there are typically three ways to negotiate or lower your closing costs.
- Some banks may provide rebates to eligible borrowers and some first-time homebuyers. Ask different lenders about any incentives available to you to help lower the final closing costs.
- You can also compare lenders and research interest rates and fees before committing to ensure you’re getting the best deal possible. Look at each mortgage offer side-by-side so that you make the best choice for your financial bottom line.
- Another option is asking the seller to contribute to closing costs. In a slower part of the real estate cycle, many sellers will offer to pay for some of the closing costs to make the sale.
Be Ready for Closing Costs
Closing costs are an inevitable part of the home-buying process. Even in the event of a seller paying some closing costs, buyers will still have to foot a certain amount. Be ready for closing costs and make sure that you’re aware of anything that could come up before you find yourself suddenly behind financial schedule come closing day. With proper preparation, you should be ready to come to the closing table ready to walk away with a smile on your face and with keys in hand.