What are closing costs and how much are they?

Whether you apply for a new home loan or refinance an existing mortgage, you can expect to incur at least a few fees. Knowing what closing costs cover and when you must pay them may help you prepare when finalizing your mortgage.

Your closing costs depend on several factors, including your mortgage amount, the type of home loan you get and the location of your home. Let’s explore the closing costs you should expect to pay and learn how you could potentially reduce your expenses.

What are closing costs?

Closing costs are supplemental charges that buyers need to plan for in addition to saving for their down payment. These charges cover the various fees associated with closing on your home. While every transaction’s closing costs will be slightly different, you can generally expect them to include things like mortgage application costs, property inspection fees and charges from your attorney. 

How much are closing costs?

According to CNN, homebuyers can generally expect closing costs to range from 2% to 6% of the loan amount. This means that your total closing costs will vary depending on the loan size. For example, if you’re taking out a mortgage of  $300,000, you may likely end up spending another $1,500-$16,200 on closing costs.

As far as how much you can expect to spend, that will largely depend on the home’s purchase price, the area in which you intend to buy and other specifics of your transaction. However, these costs tend to fall within a similar range, no matter what your budget or ZIP code.

Who pays closing costs?

As the borrower, you usually pay the closing costs. In some cases, you may be able to ask the seller to cover some of the costs. For example, if there's not a lot of competition in the housing market in the area you're looking to move to, the seller may agree to pay some of your closing costs to encourage you to move forward with the sale.

Typical buyers' closing costs

• Application fee: Some lenders charge a fee for the initial cost of processing your loan application. Notably, you usually have to pay this fee whether or not you’re ultimately approved for a loan.
• Credit report fee:  During loan approval, your lender will check your credit. This fee covers the cost of pulling your credit report.
• Loan origination fee: This charge covers costs that come from processing your loan during the period between when your application is accepted and when the loan is disbursed at closing.
• Attorney fees: These are the fees charged by your attorney in exchange for helping you through the homebuying process. Banks may also hire their own attorney, independent of the buyers’ and pass that cost to the buyers. However, attorney fees are state-specific and are not typically applied to every loan. Your lender can clarify if attorney fees will factor into your closing costs.
• Inspection fees: The fees for any inspections — like an overall home inspection or a radon inspection — will also be wrapped up in your closing costs.
• Appraisal fee: If you’re getting a mortgage, your lender will likely require an appraisal to determine the fair market value of the home. That service fee will also be included in your closing costs.
• PMI premium: If you’re planning on putting less than 20% down on the home, you’ll likely need private mortgage insurance (PMI), which is an insurance policy that protects the lender in the event you default on the loan.
• Property taxes: At closing, the buyer reimburses the seller for property taxes paid between closing and when the tax period ends.
• Title search and insurance fees: A title search is done to verify that you’re able to own the home free and clear, meaning that there are no other ownership claims on the property.
• Recording fees: Once a new deed is processed, it’s recorded, usually at the county clerk’s office. These fees cover those costs

Typical seller closing costs

• Commission: A seller’s largest slice of closing costs is paying the commission fees for both real estate agents. The percentage depends on where you live and who you’re working with. 
• Transfer taxes: Most states and municipalities impose taxes for transferring ownership of a property from one party to another.
• Attorney fees: The seller will also be responsible for paying their own attorney fees, if an attorney is required in the respective state.

Closing costs for conventional loans

If you take out a conventional loan, your closing costs will typically include some of the buyer and seller fees, with these as well:

• Broker fee
• Discount points
• Rate lock fee
• Recording fee
• Survey fee (may be required if issues are found during the title search or property appraisal)
• Underwriting fee

Closing costs for U.S. Federal Housing Administration (FHA) loans

When you get an FHA loan, you must pay most of the applicable fees from the list above, based on the requirements set by your lender or service provider.

Closing costs for U.S. Department of Veterans Affairs (VA) loans

Along with most applicable conventional loan fees, VA loans require a funding fee. According to the U.S. Department of Veterans, this one-time payment ranges from 1.25% to 3.3% of the mortgage amount . The percentage depends on your down payment amount and whether you're a repeat VA loan customer. In general, VA borrowers with higher down payments have the lowest funding fees. According to Veterans United Home Loans, in certain instances, some veterans may have the funding fee waived entirely . A few examples of those who are typically exempt from paying the VA funding fee include veterans who receive compensation for service-connected disabilities and veterans who receive disability compensation but do not receive the retirement pay.

When do you have to pay closing costs?

No matter who covers the closing costs, most are typically paid when you close on your loan. Some fees, such as the appraisal or application fee, may be charged upfront. If you're responsible for the closing costs, that means you need to be ready to pay these fees in addition to making a down payment.

In some cases, you may be able to roll some or all of your closing costs into a refinance loan so that you can pay them off over time. Some conventional loans and government-backed loans allow you to wrap some closing costs into your refinance mortgage. Be aware that while you won't have to pay a large lump sum at closing, your mortgage amount and monthly payment will be higher because closing costs are rolled into your new loan.

How to reduce closing costs

Before you finalize your mortgage, you may be able to lower your closing costs. Some of the most common ways to lower your closing costs include:

• Explore other loan types: If your closing costs seem too high, ask your lender about other loan options that may be more affordable. Request a breakdown of your upfront expenses and your total costs over time. Ask your lender if any fees are negotiable. With this information in hand, you can better identify the best option for your situation.
• Add closing costs to the loan: Paying closing costs upfront can be challenging, especially if you're also making a large down payment. To lower your upfront costs, consider rolling some of them into the loan so you can pay them off gradually. Be sure to ask your lender how this would impact your loan amount and monthly payments. Some lenders offer an option that allows you to pay a higher interest instead of closing costs.
• Consider lower- or zero-point options: Buying mortgage discount points lowers your interest rate and helps you save money over time, but it requires you to pay hundreds or thousands of dollars when you close. To decrease those upfront fees, think about buying fewer mortgage points and increasing your interest rate slightly. Ask your lender for a cost breakdown so you can compare how much you'd save upfront to how much you'd pay over time.
• Ask the seller to cover the costs: Consider asking the seller to pay part of the closing costs, especially if the seller hasn't received competing bids. When a property has only one potential buyer, the seller has limited options and may be more motivated to cover closing costs.
• Request a no-closing-cost mortgage: Some lenders offer home loans with no upfront costs. Inquire with your lender to see if this is an option they offer.
• Shop around: Another option is to shop around to ensure you’re getting the best deals. Be aware that some closing costs, like property tax amounts, are fixed and cannot be negotiated down. For others, like attorney fees, it may be possible to shop around for a better price.  

If you notice substantial differences between the closing costs listed on the loan estimate and the closing disclosure, ask your lender for more information. Your diligence could help you identify unexpected expenses or excessive fees that could affect your ability to pay your closing costs.

In summary

Home loans are likely to have at least some closing costs. In addition, you may need to bring additional funds to closing to cover additional costs such as homeowners insurance, property taxes and mortgage insurance. Depending on your loan type, you may have to pay additional mortgage insurance. Take time to understand which costs you can negotiate and when to ask the seller or lender to pay them. Speak to a Home Lending Advisor to learn more about closing costs.

Closing costs FAQs

1. Can you roll closing costs into your mortgage?

Yes, you can roll closing costs into a mortgage. Keep in mind: This means you’ll be paying interest on the closing costs, too.

2. Can I pay closing costs with a credit card?

Most lenders and title companies do not accept credit cards for your closing cost payments, but you may be able to use one to pay certain fees leading up to closing. Speak with your lender to learn more about your options.

3. How do you pay closing costs?

There are several ways for you to pay closing costs, including with the funds in your bank account or by rolling them into your mortgage.