How Much Are Closing Costs?

How much are closing costs on a house? Depending on where you are located, closing costs on a house can range anywhere from 2-5% of the total loan amount. This factors in property taxes, mortgage insurance, prepaid costs, and other fees. 

What are Closing Costs?

There are many fees required for the expenses and services involved to finalize a mortgage and close on a house, but that is the final step in the path to homeownership. Whether you are buying a new home or refinancing, you will need to pay these closing costs. The majority of the closing costs are for the buyer to pay, but there are a few fees the seller may have to pay as well, such as a commission for their real estate agent. Your mortgage lender should provide a detailed account of your closing costs in the estimate you’ll receive after you apply for the loan and in a closing disclosure leading up to finalizing the settlement.  

How much are closing costs?

How much are closing costs for buyers? Average closing costs range from 2-5% of the total loan amount. You can research comparable rates and try to negotiate some of the fees with your lender in order to lower your closing costs. Sometimes it is possible to finance those costs by having them included in the mortgage if that is something your lender offers, but you will end up paying interest for those fees for the duration of the mortgage. Generally, the most cost-effective approach is to pay the closing costs in one lump sum out of pocket.  

Typical Fees with Closing Costs

• Mortgage Origination fees:
• Also known as an underwriting fee, administrative fee, or processing fee. These are fees charged for evaluating and preparing the loan, either by the bank or mortgage lender, and often include notary fees and the lender’s attorney fees. Loan origination fees make up 0.5-1% of the total mortgage amount. They are potentially negotiable if the borrower has good creditworthiness, and typically, the more collateral the borrower can provide the higher the likelihood that they can negotiate. Having a higher FICO score also provides more negotiating power. 

• Discount points:
• Discount points are another typical closing cost. They are a kind of prepaid interest where the buyer can buy discount points upfront so that the bank will charge a reduced interest rate you would pay over the life of the loan. This would allow for a more competitive mortgage rate. The bank would require a good credit report and a loan application, but often those fees are covered by the bank. One discount point equals 1% of the loan total. Typically, paying upfront for these points is only practical if the buyer plans to live in that house for many years. Otherwise, the cost would not be worth it.

• Appraisal fees:
• These are fees paid to an appraiser who will then assess the home’s overall value. It is necessary to a mortgage lender to ensure the house and property you are buying is worth as much as you are asking to borrow for it. The appraisal is usually required in order to verify the amount needed for the loan is justifiable and to ensure the lender can recoup the value of the property if the buyer defaults on their loan. Generally, the cost of a home appraisal runs between $300 to $500, depending on the location, property type, and property size. If the lender does not require an appraisal, it is still worthwhile to get one in order to know the value of the property and ensure you are not being overcharged for it. 

• Title insurance:
• This is a type of indemnity insurance given by title companies that protect against any losses resulting in issues with the title; for instance, violations from previous owners, liens, mortgages, or outstanding taxes. Generally, lenders will require this insurance and that it be paid as a one-time fee at some point during the closing process. Depending on which state you are in, the buyer or the seller may have to pay for title insurance.  

• Real estate agent fees:
• If the property was listed by a real estate agent, there will be an agent fee included in the seller’s closing costs. This fee usually runs between 2-6% of the home’s sale price. That will generally cover both the listing agent’s and the selling agent’s commission, and from there the listing agent can determine how that commission is divided up.

• Prepaid costs:
• Prepaid costs are when the lender requires buyers to pay for some things such as property taxes and homeowners insurance in advance. Prepaid costs are usually included in the buyer’s closing costs and would need to be paid before getting a loan. They can also involve mortgage interest that would accrue between closing and the end of the month.  

• Private Mortgage Insurance (PMI):
• PMI is another closing cost buyers have to cover if they are purchasing a home using a loan with a down payment of less than 20%. PMI fees range from 0.3-1.5% of the original loan per year, varying on the size of the down payment and the buyer’s credit score.

How to Reduce Closing Costs

It is usually possible to reduce closing costs through some negotiations. One way to reduce closing costs is by paying for the house in cash, which would eliminate lender fees. When that is not possible, consider asking the seller to pay an approved portion of closing costs as part of negotiations. Buyers can also negotiate fees with their lender when applying for a loan.  

Summary

Closing costs are additional expenses added to the price to own a home. Both buyers and sellers typically have closing costs, which can range from 2-5% of the price of the house. Some of the costs involved include mortgage lender fees, title fees, real estate agent fees, insurance, and more.