Nobody likes to be caught off-guard, especially during a life-changing event like buying a new home. The good news is we’re here to help you prepare for one of the final steps in the homebuying process–paying closing costs. Read what to expect so that you leave plenty of room in your budget for these fees. We’ve even included a few ways you might be able to reduce them.
Calculating closing costs
Also referred to as settlement costs, closing costs are expenses that the buyer pays over and above the price of the property. It shouldn’t come as much of a surprise that they’re paid when you close the home.
Defining exactly how they are calculated can be tricky because they are not one specific line item, but instead a collection of variable expenses identified for different reasons. The variables can include:
- The state or county in which you are buying a house
- The lender you choose and their requirements
- The type of mortgage you are getting
- The real estate agents you are using to purchase your house
While the exact expenses aren’t the same for all home purchases, there are some common fees you can expect to pay. These can be broken down into recurring payments and one-time fees.
Ongoing costs may include items like:
- Property taxes: One to twelve months’ worth
- Homeowner’s insurance: According to Trulia, “the annual premium is typically due at closing, plus another two or three months’ worth of payments”
One-time or nonrecurring expenses may include:
- Origination fee: Paid to the lender for the costs of processing the loan
- Discount points: Essentially a one-time cost, typically paid in exchange for a lower interest rate. Each point is equal to 1% of the total loan amount.
- Processing fee: Charged to a potential borrower for processing a loan application
- Underwriting fee: For the underwriter who assesses the eligibility of potential buyers to ensure that they “meet all requirements set forth by the lender, the federal government, and the secondary mortgage market”
- Appraisal fee: Depending on your property type and location, the price varies, but generally, the fee will be several hundred dollars
- Settlement agent fees: Cover the office handling the exchange of money and documents–usually by the title company or attorney
- Title fees: For the title search “to unearth any liens on the property that could interfere with your ownership of it.”
- Recording fees: A government fee determined by the county and assessed for legally recording the Deed of Trust or Mortgage and other documents related to the loan
How to estimate your closing costs
Most realtors and financial advisors tell you that closing costs will typically be in the range of 2-5% of the home value. For a more accurate estimate of how much money will be needed, check out Guild’s handy Cash-to-Close Calculator.
Three ways to cut closing costs
Realtor.com offers these helpful tips that can reduce the amount owed at closing:
- Negotiate with the seller to pick up some or all of your closing costs
- Close at the end of the month to pay less per diem interest
- Wrap closing costs into your loan
Check your fees before closing day
Your closing disclosure from your lender is a five-page document that includes all final details about your mortgage, including closing costs. Lenders are required to provide this document three days before your scheduled loan closing. Use these days to double-check all the details about your loan and ask your lender any questions if something looks different from what you expected.
The above information is for educational purposes only.