There are a lot of costs associated with buying a home that go beyond the down payment. Buyers (and sellers) must have funds set aside for closing costs, which are funds paid at settlement to the service providers who assisted with the transaction. These costs can include title policies, recording fees, inspections, courier charges, reserves to set up escrow or impound accounts, and various fees that lenders typically charge.
The total cost can come as a shock to many homebuyers who are only looking at coming up with the amount of their down payment. In this article, learn exactly how much you can expect to pay in closing costs so that buying the home of your dreams can become a reality.
- Closing costs to buy a home average around 3% of the total purchase price.
- Some closing costs are the responsibility of the seller, but most fall upon the buyer as one-time costs.
- Buyers should also be prepared to pay recurring costs when they become homeowners, such as property taxes and insurance premiums.
- Closing cost assistance may be available from state finance agencies or government programs for qualifying buyers.
- Sellers may be willing to offer concessions or credits towards the closing costs, which are then worked into the overall purchase price.
How Much Can You Expect To Pay?
Closing costs to buy a home typically run from about 2% to 6% of the purchase price, with an average of around 3%. The total will primarily depend on the points and origination fees a lender charges to make the loan.
Points and origination fees are payments that must be disclosed on the lender's loan estimate.
For example, total closing costs to purchase a $300,000 home could range anywhere from approximately $6,000 to $15,000—or even more. The funds typically can't be borrowed, because that would raise the buyer's loan ratios to a point where they might no longer qualify.
One-Time Closing Costs for Buyers
Many closing costs are non-recurring, in that they must be paid just once. Buyer's closing costs that are one-time charges may include:
- Title policies
- Escrow or closing fees
- Tax service fees
- Notary fees
- Wire fees
- Courier/delivery fees
- Attorney fees
- Recording fees
- State, county, or city transfer taxes
- Home protection plans
- Natural hazard disclosures
- Home inspections
- Lender fees paid along with the loan on the loan estimate
It's best to shop around and compare prices for some fees and services that you will require when buying a home. Lender fees, for example, can be one of the most significant of all closing costs, depending on the lender.
Other Closing Costs To Know
There are buyer's closing costs that you'll pay again and again, either monthly or yearly as time goes on, much like a typical insurance premium. They're often fees collected in advance of closing for prepaid premiums and establishing impound/escrow accounts. They include:
- Fire insurance premium
- Flood insurance (if required in your area)
- Property taxes
- Mutual or private mortgage insurance premiums
- Prepaid interest
The time of the year when you close will dictate how many pro-rata months of premiums the lender will collect to hold against future payments of taxes and insurance.
Not every loan requires an impound or escrow account, but loans totaling more than 80% of your purchase price will demand them.
How To Save on Closing Costs
Every home sale is unique, and depending on your situation you may be able to find ways to trim some of the closing costs. Each party, contractor, inspector, or agent you work with along the way may be considered a resource for information about how to save money on any given step in the larger process, but you might also consider some of these common solutions.
What About "Free" Closing Costs?
First-time homebuyers can sometimes catch a break and have their closing costs paid for by a government agency. However, there are many eligibility requirements a buyer will have to meet, including household income limits. Check your county or state down payment assistance programs to see if you qualify for this type of assistance.
Not all state housing finance agencies (HFAs) provide down payments to buy a home, but some do. Others will often lend closing costs on favorable terms that won't affect loan ratios.
Programs that provide for buyer's closing cost assistance often record an instrument in the public records to provide security for the loan. But this loan typically carries zero interest and has no set due date. It must be paid off at the time of sale if the homebuyer later sells the property, or upon a refinancing, whichever occurs first.
A seller credit, sometimes referred to as a "seller concession," is effectively money contributed to the buyer from the seller to cover some closing costs. Seller credits are not paid to buyers directly. Instead, the amount is rolled into the sale price of the home, lowering the cost of the overall loan.
Always check with your lender before you negotiate an offer that involves a seller credit. In some cases, the lender might not allow it. Some common scenarios include:
- The lender might limit your credit to 3% of the purchase price if you're financing 100% of the purchase price.
- Depending on your FICO score and the amount of your down payment, the lender might allow a seller to credit you as much as 6% of the purchase price.
Further, TRID—the TILA RESPA Integrated Disclosure rule that governs mortgage disclosure statements—might not allow any last-minute changes to your closing statement in the final days before closing. These credits will be notated on your closing statement.
Lenders also sometimes offer credits toward some of your closing costs, but you'll have to agree to pay a higher interest rate over the life of the loan. That can save you cash at the time of the sale, but cost you more later.
When More Costs Might Be Better
Lenders will often permit you to pay "points," sometimes called "discount points," at closing. These fees are paid in exchange for receiving a lower interest rate over the life of the loan, which could potentially save you money in the long run.
One point usually runs around 1% of the amount you're borrowing. However, paying them will drive up your closing costs.
Frequently Asked Questions (FAQs)
How much are closing costs on a refinance?
Closing costs on a refinance are similar to the closing costs involved with buying a home. They average about $5,000, according to Freddie Mac, and include credit report fees, origination fees, appraisal fees, and recording costs.
Who pays the closing costs on a house?
Both buyers and sellers pay the closing costs on a house. The buyer handles the costs involved with financing the home. The seller typically pays the commission for both the buyer's agent and the seller's agent. Sellers may also agree to seller concessions, which help to cover closing costs for the buyer.