Closing Costs Explained

Once you’ve saved for a down payment, found the prefect home, and received a formal pre-approval for a mortgage, closing costs can be an unpleasant surprise if you’re unprepared.

What are closing costs?

Closing costs are fees you must pay when you buy or refinance a home. Here are 5 things to know:

1. They typically range between 1% to 3% of the total amount borrowed. For example, for a $500,000 mortgage, you could expect to pay anywhere between $5,000 to $15,000 in closing costs.
2. The closing costs are typically paid out of pocket at the loan closing. However, the exception is the home inspection, which is usually due and payable at the time it is performed.
3. It’s possible to negotiate a seller credit for some, or all, of the closing costs as part of the contract signing process. Your real estate agent will help guide you through this process. Many lenders place limits on the amount you can receive as a seller credit, typically between 2% and 6% of the purchase price, depending on the loan program and other factors. Be sure to work with your Home Loan Consultant or lender to understand the limits associated with your particular loan program.
4. They fall within two different buckets: recurring and non-recurring. Recurring costs are associated with costs you will make at closing and continue to pay for as a homeowner. Examples of recurring costs are homeowner’s insurance and taxes. Non-recurring costs are one-time fees associated with the purchase of your home – we’ll outline many of these fees in the next section below.
5. Lenders are required to give you an estimate of the closing costs for your transaction within three business days of receiving a completed application. (This is called a Loan Estimate.)

Tips & Facts

Closing costs fall within two different buckets: recurring and non-recurring. Recurring costs are associated with costs you will make at closing, and continue to pay for as a homeowner.

What is included in closing costs

Now we’ll cover some samples of the types of closing costs you may see on the Loan Estimate.

• Appraisal fee – This is a fee that you pay to have a professional appraiser evaluate the value and condition of the home you are buying. It can cost as much as $700 – $800 and it is required by most lenders to ensure that the home’s value is sufficient to secure the amount being borrowed and its condition meets collateral suitability requirements.
• Impound account – Also known as an escrow account, this is set up and maintained by your lender/servicer to pay your property taxes, homeowner’s insurance, and if applicable, mortgage insurance premiums. These accounts require an initial funding (typically equivalent to two months’ worth of taxes and premiums) that’s paid out of pocket at loan closing, with subsequent funds collected with each monthly mortgage payment. Impound accounts are typically optional, but they may be required for certain loan programs or for loans with down payments of less than 20%.
• Title insurance – This is a type of insurance that protects you and your lender from any claims or disputes over the ownership of the property. It is usually based on the purchase price of the home, and it covers the cost of a title search which verifies the legal history of the property. There are two types of title insurance available:
• Lender’s policy – This policy protects the lender from losses due to undiscovered defects in title that could arise after the purchase, such as outstanding liens, back taxes, or unsettled ownership claims, such as from contested wills. Your lender will require this coverage, and the buyer will pay the cost for this coverage at loan closing.
• Owner’s policy – This policy protects you from financial losses due to the same perils that are covered in the lender’s policy. While this coverage is optional, it is highly recommended. In some areas, it’s customary for this cost to be paid by the seller, and if you purchase both policies from the same title insurance provider your cost could be lower compared to buying them separately.
• Mortgage insurance – Government-insured loans like FHA, VA, or USDA require an upfront payment for all or part of their mortgage insurance premiums. These premiums are typically rolled into the new loan, or you may opt to pay them out of pocket at closing. Depending on the program, the fees can range from 1.00% to 3.30% of the loan amount.
• Escrow fee – This is a fee you pay to an escrow company, which is a third party (or it may be the title insurance provider) that holds and transfers the funds and documents between you and the seller. It is usually a percentage of the purchase price or a flat fee, depending on the state and the company.
• Recording fee – This is a fee you pay to the county or city where the property is located to record the transfer of ownership in the public records. It is usually a flat fee, such as $200 or $300.
• Transfer tax – This is a tax you pay to the state or local government when you buy a property. It is usually a percentage of the purchase price or a flat fee, depending on the location and the type of property. Often, you can negotiate for this fee to be paid by the seller.
• Home inspection fee – This is a fee you pay to have a professional inspector check the condition of the home you are buying. It is usually $350 – $450 and it is optional, but highly recommended, to identify any potential problems or defects in the home. A home inspection is separate from the Appraisal that will be required by the lender and will give you a more complete picture of the condition of the home and its major components.
• Wood destroying pest inspection fee – This inspection, usually paid for by the buyer, provides details of any active infestations of termites, fungus, or dry rot (called Section 1 findings) along with any findings of conditions that could lead to future infestations if not corrected (called Section 2 findings). The inspection fee typically runs around $200. If required by the lender, the cost for any repairs done is typically paid for by the seller.
• Survey fee – This is a fee you may need to pay to have a professional surveyor measure and map the boundaries and features of the property you are buying. It usually averages $400 – $800, although it can be as much as $2,000 – $5,000 in some states or situations. While it is typically optional, sometimes it may be required by the lender or the title company to verify the size and location of the property.